IHD: High-Yielding Emerging Market Fund Focused On High-Growth Markets

IHD has been consistently generating high yields since it started its operations 12 years back. The annual average yield since 2013 has been almost 11.5 percent. IHD focuses on China, India, Taiwan, and South Korea – four economies that have investment-grade sovereign ratings and above-average growth potential. IHD’s portfolio is well-diversified among the different high-growth sectors in emerging markets and carries the usual risks that such a fund will generally have.

IHD: High-Yielding Emerging Market Fund Focused On High-Growth Markets

Voya Emerging Markets High Dividend Equity Fund (NYSE:IHD) is a closed-ended equity mutual fund that invests in equity stocks in the emerging markets, primarily in high-growth Asian markets like China, India, Taiwan, and South Korea. The fund also invests in derivatives, primarily call options on selected exchange-traded funds, or international, regional or national equity indices. IHD seeks to generate strong total return primarily through a high level of current income. The fund offers dividend yield in the double-digits. Annual average yield since 2013 has been almost 11.5 percent. The stock is currently trading at a significantly high discount of 13.15 percent to its net asset value.

Voya Emerging Markets High Dividend Equity Fund Generates Strong Yield

Voya Emerging Markets High Dividend Equity Fund was launched by Voya Investment Management LLC. It was formed on April 26, 2011 as ING Emerging Markets High Dividend Equity Fund. The fund is co-managed by Voya Investments, LLC and ING Investment Management Advisors B.V. IHD benchmarks itself against the performance of MSCI Emerging Markets Index. It employs both fundamental and quantitative analysis with a bottom-up stock selection process to create its portfolio. IHD pays quarterly dividends. Though the payout dollar decreased over time as a response to a fall in the market price of IHD, still it has been quite consistent. Since the last quarter of 2016, quarterly pay-out was almost consistent around $0.18. The fund generated a yield of 13.27 percent during 2022 and 12.43 percent during 2023.

IHD Focusses on High-Growth Markets of China, India, Taiwan, South Korea

Almost two-third of this fund is invested in four of the fastest growing large emerging economies – China, India, Taiwan, and South Korea. These four markets have an investment grade sovereign credit rating and are expected to generate high economic growth. Sixty percent of the fund is also invested in stocks from three sectors – financial, industrial and information & communication technology (ICT). India is projected to grow at 6.8 percent, the fastest among all major global economies. Other three markets are expected to grow between 2.6 percent to 4.5 percent. The ICT sector is the mainstay of these markets. India and Taiwan have some of the world’s largest ICT firms.

These Four Markets Have Strong Credibility and High Growth Prospects

China’s relaxation of its COVID-19 containment measures has been extremely beneficial for technology, materials and industrial sectors. Financial sector, as we all know, is the direct beneficiary of any form of economic activity or growth. Indian and Chinese banks are generating exceptional growth. According to a report published in ‘Business Standard’ on February 20, 2023, titled ‘Indian banks gave highest returns in Asia Pacific region: S&P Global report’, banking stocks from India and China delivered the maximum returns during Q4, 2022. The report quotes “Indian banks occupied 11 of the 15 slots in a list compiled by S&P Global Market Intelligence of Asia-Pacific bank stocks with the highest total returns in the quarter ended December 31, 2022…. Apart from Indian banks, three banks from mainland China and one from Japan made it to the list of top performers in the fourth quarter of 2022.”

Composition of IHD’s Top Investments in China, India, Taiwan, South Korea

Investments in the information & communication technology sector were made only in the equities of Indian and Taiwanese companies – two pioneering markets for ICT. The list included Taiwan Semiconductor Manufacturing Co Ltd (TSM), Hon Hai Precision Industry Co., Ltd. (OTCPK:HNHAF), MediaTek Inc. (OTCPK:MDTKF), ASE Technology Holding Co Ltd (ASX), Accton Technology Corp., United Microelectronics Corp (UMC), Infosys Ltd (INFY), and Tech Mahindra Ltd. South Korean industrial giant Samsung Group attracted significant investments in three stocks – Samsung Fire & Marine Insurance Co. Ltd. (SFM), Samsung Electronics Co., Ltd. (OTCPK:SSNLF) and Samsung SDI Co., Ltd.

Voya Emerging Markets High Dividend Equity Fund has made significant investments in equities of financial enterprises from India, China and South Korea. IHD invested in Housing Development Finance Corp (HDB), ICICI Bank Ltd (IBN), Axis Bank Ltd., Bajaj Finance Ltd., Agricultural Bank of China Limited (OTCPK:ACGBY), China Construction Bank Corporation (OTCPK:CICHY), Bank Of China Limited (OTCPK:BACHF), Ping An Insurance (Group) Company of China, Ltd. (OTCPK:PNGAY), Hana Financial Group Inc., KB Financial Group Inc (KB), Shinhan Financial Group Co Ltd (SHG) and Woori Financial Group Inc (WF).

When it comes to Chinese firms, within the communication services and consumer discretionary sector, a significant proportion of investments were made in technology-oriented businesses like e-commerce, online services, etc. Examples included Alibaba Group Holding Ltd (BABA), Tencent Holdings Limited (OTCPK:TCEHY), Meituan (OTCPK:MPNGF), JD.com Inc (JD), NetEase Inc (NTES) and PDD Holdings, Inc. (PDD). These 28 stocks were some of the best performing stocks within all the emerging markets worldwide. Over the past five years, these stocks have been highly sought after and were included in most EM funds focusing on the markets of China, India, Taiwan, and South Korea.

This EM Fund Contains Usual Risk, But Its Strong Yield Compensates for That

The developed markets throughout the globe are feeling the pinch of inflation and have slowed down. European and American markets are fearing a possible recession. The Russia-Ukraine conflict is acting like a slow poison. So far, the Indian and Taiwanese economies have performed exceptionally well. As the Chinese economy reopens, demand is expected to increase, and will provide a stimulus for further growth not only in China but throughout this region. However, the business environment still remains challenging and resumption of robust growth is by no means assured. Voya Emerging Markets High Dividend Equity Fund thus has to absorb the risk of market slowdown.

Voya Emerging Markets High Dividend Equity Fund also has a management fee of 1.35 percent, which is quite high as compared to other emerging market Funds. The pay-out amount has dropped more than half since the fund started operating in 2011. The same happened to IHD’s market price. Price of this emerging market fund came down from a level of $20 in 2011 to the level of $5.15 at present. However, the average yield over the long run is too high to be defensive over these usual risk metrics. On top of that, this EM close-ended fund is currently available at a significantly high discount of 13.15 percent.

Investment Thesis

I find Voya Emerging Markets High Dividend Equity Fund to be attractive. The fund generates high yield and has an acceptable total return over the longer term. IHD has been consistently generating high yield since it started its operations 12 years back. During the 6-year period between 2016 and 2021, annual average total return was 10.37 percent. Return during 2022 was negative, but this was the case with all funds and broader markets. IHD’s returns are also in sync with other emerging market funds. The fund however has a comparatively high expense ratio, which creates some risk for this fund.

The portfolio is well-diversified among the different high-growth sectors in the emerging markets, and carries the usual risk that an EM fund will generally have. It invests the majority of its assets in three sectors (ICT, financial, and industrial) that have high-growth potentials. The four economies in which IHD focusses on have investment grade sovereign ratings and have high growth potential. This makes the current level of yield almost sustainable. However, there is little concern about the future price performance of this fund, as the Chinese economy is yet to open up fully and come back to its usual level of performance. Over the long run, total return thus remains uncertain. In my opinion, the Voya Emerging Markets High Dividend Equity Fund suits the needs of only income-seeking investors due to its high and sustainable yield.