ZTR: Diversified Portfolio And Attractive Income (NYSE:ZTR)

Written by Nick Ackerman, co-produced by Stanford Chemist

Virtus Total Return Fund Inc. (ZTR) came up in a discussion the other day. I hadn’t looked at this fund for a while – though years ago I had owned it myself. That was back before the premiums came to the fund and it traded at a discount level for years. After the distribution cut that took place in June, the fund has not gone back down to an attractive valuation. The 12%+ distribution is quite attractive too. Though I wouldn’t necessarily rely solely on that distribution for investing in this fund. It would appear that some destructive return of capital is required to continuing funding the rate.

ZTR has an objective of “capital appreciation, with current income as a secondary objective.” This is quite unique in that most CEFs have this the other way around. Additionally, it is curious that their share price has declined since its inception. Of course, this came on the back of some really strong distributions. Factoring in those double-digit yields and the fund is showing attractive total returns. The fund has been able to put up double-digit returns for the last 10-year period as well.

To meet this objective, the fund invests in a hybrid allocation of “approximately 60% of its total assets in equity securities and 40% in fixed-income.” Essentially, it is the classic 60/40 split that is generally accepted as a good barometer overall. In this case, though, we get professional managers to actively allocate the portfolio.

That being said, the equity portion of their portfolio “invests globally in owners/operators of infrastructure in the communications, utility, energy, and transportation industries.” We see several holdings of this fund that we see in other stalwarts such as; Reaves Utility Income Fund (UTG) and Cohen & Steers Infrastructure Fund (UTF).

The fund also previously had an options strategy. They removed that at around the same time as cutting the distribution. This also removed a subadvisor from the fund. This fund was also a product of a merger last year. It was merged into the Virtus Total Return Fund Inc. (ZF) with the ZF ticker – they kept that name and changed the ticker to ZTR. So, when discussing ZTR, it is the history of ZF that we are looking at in most instances.

That combination grew the fund’s total managed assets. The fund now manages assets of $573,807,682 currently and was incepted on February 24th, 2005. The fund utilizes leverage of around 27.7%. The total expense ratio was last reported as 2.58%. Excluding the leverage and expenses would have been around 1.33%. That seems about average for a hybrid portfolio of global assets.


Performance – Strong Historical Performance For This Hybrid

The historical performance has been pretty strong. As of Their Q2 Fact Sheet ending 6/30/2020, the fund is showing double-digit annualized returns for the last 10-years.

(Source – Fact Sheet)

Since that last report, the fund’s NAV has continued to rebound just a bit, while the share price has fallen. Right around that time, they implemented a cut into their distribution.


Data by YCharts

That gives us the slightly better returns that we see for the monthly end of 8/31/2020. Due to the fund’s launch in 2005, it has now ‘survived’ two market crashes.

(Source – Fund Website)

Also reflected above is on a YTD basis, the NAV has declined significantly less than the share price. Of course, that opens up discounts for CEF investors. Those are when most CEF investors start to get excited. Currently, the discount is reported at 12.29%. The last 1-year average discount is 1.08%, and we are given a 1-year z-score of -1.50. That isn’t absurdly cheap, though it is still attractive. The last 5-year discount of the fund is also 6.17%, which does take some of the appeal away. However, the fund had the benefit of trading at a premium for several years.

Previous to the last few years, the fund traded at a steep discount for what seemed like forever. Since its inception, this fund has really gone between pretty extreme premiums and extreme discounts. It is hard to gauge exactly where we go from here, though at this time the discount seems to be about as steep as the fund has historically gone. Meaning that the downside due to a widening discount seems to be off the table – if historical levels are any indication.

(Source – CEFConnect)

The historical trading trend might be affected due to the fund’s merger last year in November.

Distribution – Rich Yield, But Not Necessarily Reliable

Additionally, we can see two different distribution histories for this fund. Though the distribution history of ZTR was much stronger than that of ZF. The new ZTR shows the distribution history of ZF on CEFConnect – this is also displayed on the website.

This makes a difference as ZTR was a monthly payer for as far back as I can remember. For ZF, it was a quarterly payer for years after the GFC. Though after the merger it appears they satisfied ZTR investors and went back to monthly pay.

(Source – CEFConnect)

The current distribution yield works out to 12.02%, with a NAV rate of 11% due to the attractive discount. This is paid monthly at $0.08 per share. The previous amount was $0.113 per month. I believe that is a contributing factor to why the fund had gone from a premium to a discount since then in a pretty quick manner. Since the fund was at premium levels, investors could take advantage of their discounted DRIP at reinvestment prices lower than the going market rate.

The last Semi-Annual Report they have available is showing a full 6-months of the combined fund. That is a good thing as the numbers should be rather accurate going forward. It also is for the period ending May 31st, 2020 – that calculates some of the damage done by the pandemic.

(Source – Semi-Annual Report)

Noted in this report is that if the company had been combined on December 1st, 2018, that NII would have been $11,647.

(Source – Semi-Annual Report)

Essentially, that puts the fund’s 6-month NII amount around $1 million shy of the amount last year if annualized out. The fund’s 16.8% NII coverage is rather low for a portfolio that includes a heavy allocation to fixed-income investments.

Though it also includes a healthy amount of equity allocation, the portfolio isn’t currently sitting on unrealized gains that they can draw from for their distribution. Thus, ROC will be a part of their distribution at least for now. If assets are continued to be eroded away, it does ultimately make it more difficult to earn going forward as well.

Though as we highlighted above, the fund was able to almost earn the current distribution on an annualized basis over the last 10-years. This is measured as the NAV’s total return was 10.49%. Additionally, the NAV held somewhat flat for 10-years as well.


Data by YCharts

Without the crash earlier this year due to the pandemic, the fund’s NAV would have grown. Thus, meaning they had, at least historically, earned the distribution rate they were paying out. That is what makes it intriguing for potentially the next 10-years.

Portfolio – Classic 60/40 Split, With A Focus On Utilities/Infrastructure

The strength in returns for a fund that has exposure to global securities is also interesting. Though the exposure focusing on utilities/infrastructure can certainly help explain some of the performance being sheltered from other globally focused funds.

Currently, the allocation to the U.S. is the largest at 65%. This is followed by Canada and Spain allocations. North America and Europe dominate the primary exposure of the fund. That is also another reason for the stability of the fund and can be positive for investors.

(Source – Fact Sheet)

In their fixed-income sleeve, they are even diversified quite broadly. They have exposure to a varied amount of fixed-income and credit qualities within them. The exposure to different credit qualities between high-yield and investment-grade can help offset each other. This is especially true if high-yield investments start to default due to worsening economic conditions.

(Source – Fact Sheet)

True to their policy though, they remain heavily invested in utilities and industrials. Industrials have certainly taken a hit during the pandemic as supply chain disruptions and demand has sunk. The energy exposure might put some investors off. However, that ~10% allocation has to be put into perspective. It is 10% of their equity sleeve that is roughly 60% of their portfolio. Considering that, energy makes up less than 10% of their total assets. Which is a small amount – and much more in-line with the other stalwart utility funds we mentioned above.

Besides the larger than typical discount and high-yield of this fund, the other area that caught my attention was the top ten listing. These are some of the names we see in many other funds. Except, with this fund, an investor also gets a focus on fixed-income allocations too – setting this fund a bit apart from the others that we cover regularly.

(Source – Fact Sheet)

Companies like American Tower Corp. (NYSE:AMT) and NextEra Energy Inc. (NEE) are companies that we have highlighted specifically. This is due to their strong forward potential and inclusion in many funds that we cover. Crown Castle International Corp. (CCI) is another tower REIT that will benefit from the same 5G plays that AMT will as well. Though AMT always seems to be the one that investors tend to gravitate towards. AMT had put up better returns over the years; however, CCI has caught up over the last year or so. Another draw to AMT is that their dividend growth has been stronger.

NEE is the largest renewable utility company, which is an excellent play on the ESG trend. Dominion Energy Inc. (D) is also another company we see in many other portfolios. They are currently transitioning a bit though, which seems like a long-term positive. They were exiting the natural gas transmission and storage business. That puts them at more of a focus on their utility business. The area of their business that remains rather steady and less “exciting.” With that plus restructuring did come a future dividend cut that will take place in Q4.


The portfolio mix of ZTR is rather interesting in that it gives us exposure to some of the best utility and infrastructure companies out there today. However, it is also offset by its exposure to fixed-income at approximately 40% of its portfolio. This fixed-income sleeve also holds a mixture of investment-grade and high-yield – that further offsets it from some of the other fixed-income funds out there that focus on one or another. This hybrid allocation can be rather unique for investors to pick up on.

Of course, the biggest draw for most income investors is going to be the fund’s 12%+ distribution rate. While that is certainly attractive, for the time being, it would appear they will need to resort to destructive ROC. That isn’t necessarily a problem as long as it doesn’t erode assets too much. This is the case even as they cut their distribution, which saw its premium pricing turn to discounts. Yet another reminder that large yields on premium-priced funds can be dangerous for CEF investors!

With that being said, the fund had previously been able to cover its distribution before the pandemic crash. At least based on the ZF historical distribution when it was a quarterly payer. This was reflected by the fund being able to grow its NAV. This could bode well for the fund going forward if they can return to once again being able to cover their distribution. Buying the fund at the current price doesn’t seem like a terrible bet either, as the discount is about as wide as we have historically witnessed. All this adds up to the fund being quite interesting at current levels and a more interesting, off the beaten path type fund overall.

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Disclosure: I am/we are long UTF, UTG, NEE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was originally published to members of the CEF/ETF Income Laboratory on September 24th, 2020.

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