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The Templeton Global Income Fund (NYSE:GIM) is an underperforming global income fund that has delivered 10Yr average annual returns of -1.4%. It pays an unsustainably high distribution yield relative to the fund’s earnings.
Looking forward, things may be inflecting upwards for the GIM fund, as Saba Capital’s board nominees are set to assume control after a lengthy proxy battle. Hopefully, Saba can turn around GIM’s performance and close the fund’s persistent discount to NAV. I am placing GIM on my radar screen as a potential buy candidate following a change in fund management.
Fund Overview
The Templeton Global Income Fund is a closed-end fund (“CEF”) that seeks to provide high current income from a global portfolio of income-producing securities, including debt of U.S. domestic and foreign issuers.
The GIM fund is managed by Templeton’s ‘star’ manager, Michael Hasenstab, most well known for making large bets on emerging market debt.
The GIM fund has $462 million in assets and charges a 1% net expense ratio.
Portfolio Holdings
The GIM fund holds 114 positions and has a 3.0 Yr effective duration (Figure 1).
Figure 1 – GIM has low effective duration (franklintempleton.com)
Geographically, the fund has 44.9% exposure to Asia, 22.1% to Latin America, 10.5% to Europe, and only 4.5% to North America (Figure 2). This is quite different from its benchmark.
Figure 2 – GIM geographical exposure (franklintempleton.com)
The GIM fund is heavily skewed towards Asian currencies with 83.6% exposure, far above the benchmark weight. The fund is actually short North American currencies (Figure 3).
Figure 3 – GIM currency exposure (franklintempleton.com)
In terms of credit quality, the GIM fund is primarily invested in investment grade securities, with AAA-rated securities comprising 24.1% of the portfolio, AA-rated 3.3%, A-rated 13.0%, and BBB-rated 37.0%. Non-investment grade credits only comprise 18.8% of the portfolio (Figure 4).
Figure 4 – GIM is primarily invested in investment grade credits (franklintempleton.com)
Returns
Figure 5 shows the historical returns of the GIM fund. Incredibly, the GIM fund has negative average annual returns out to the 10Yr time-horizon! This has to be one of the worst long-term historical performances I have seen in a long time.
On an annual basis, the GIM fund has lost money 4 out of the past 10 years, with average losses of 6.0% in those 4 years vs. average gains of only 2.5% in the other 6 years.
Figure 5 – GIM historical performance (morningstar.com)
Distribution & Yield
The GIM fund pays a high monthly distribution, with trailing 12 month distribution of $0.39 / share or 9.5% yield. On NAV, the GIM fund has a trailing yield of 8.7%.
Although the fund pays an attractive 9.5% distribution yield, I believe investors should be concerned about the sustainability of that distribution. Historically, the fund has funded a significant portion of the distribution via return of capital (“ROC”), including 100% in both 2021 and 2022 (Figure 6).
Figure 6 – GIM has funded distribution out of ROC (GIM 2022 annual report)
Funds that cannot earn their distributions are called ‘return of principal’ funds and GIM appears to be one of the worst offenders in the market. With the fund earning a -1.4% 10Yr average annual return and paying a high distribution yield, it is no wonder that GIM’s NAV has halved over the past decade, from over $9 in 2013 to $4.50 (Figure 7).
Figure 7 – GIM’s NAV halved over a decade (morningstar.com)
As the NAV declines, there are less income earning assets to support future distributions, making distribution cuts inevitable (Figure 8).
Figure 8 – GIM distributions have also significantly declined (Seeking Alpha)
Long-term investors in GIM have lost both principal and income.
Discount To NAV Is The Only Positive
Probably the only positive thing I can say about the GIM fund is that it is trading at 8.4% discount to NAV (Figure 9).
Figure 9 – GIM trades at a 8.4% discount to NAV (cefconnect.com)
For funds that trade at significant discount to NAV, a ROC distribution can help unlock value of the discounted assets.
Is Saba The Answer To Poor Performance?
For long suffering GIM investors, things may finally change for the better, as Templeton recently withdrew its litigation against Saba Capital Management and its nominees to the of board trustees on February 13th, 2023.
As a bit of background, Saba Capital Management is an investment advisor / hedge fund manager led by Boaz Weinstein, one of the most prominent hedge fund managers in the past decade. Mr. Weinstein was formerly head of the proprietary credit trading group at Deutsche Bank and Saba Capital was named Risk.net’s hedge fund of the year in 2021 for successfully navigating the COVID crisis and its aftermath.
Saba has a reputation for activist campaigns against underperforming close-end funds, including the Saba Capital Income & Opportunities Fund (BRW) that Saba took over from Voya in 2021 and turned around into a top quartile fund within a year (Figure 10).
Figure 10- BRW annual returns (morningstar.com)
With respect to the Templeton Global Income Fund, Saba began building a position in GIM in 2020 and as of December 2022, held 37.5% of the shares of the fund. In May 2021, Saba’s board nominees were elected by shareholders to replace the incumbent Templeton trustees. However, Templeton sued to prevent certification of Saba’s nominees in 2022 and the two firms have been locked in a proxy battle ever since.
With Saba’s nominees finally cleared to take over the board of GIM, hopefully it will only be a matter of time before GIM’s terrible portfolio management is replaced and investors can look forward to better returns.
Conclusion
The Templeton Global Income Fund is an underperforming global income fund that has delivered 10Yr average annual returns of -1.4%. It pays an unsustainably high distribution yield relative to the fund’s earnings.
Looking forward, things may finally be turning for the better, as Saba Capital’s nominees are set to assume control of the board of trustees after a lengthy proxy battle. Hopefully, Saba’s nominees will have a plan in place to close the fund’s discount to NAV and improve fund performance. I would place GIM CEF on my radar screen as a potential buy candidate following a change in fund management.
