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A little over 15 years ago, if U.S. based investors wanted to invest in India, one of the few options available to them was The India Fund (IFN) that often traded at a large premium to its underlying assets (as much as 30% if I remember correctly). This was before WisdomTree launched the WisdomTree India Earnings Fund (EPI) and the iShares MSCI India ETF (INDA) started its journey to becoming the largest India focused ETF.
What was the difference between The India Fund and ETFs like those launched by WisdomTree? The India Fund was a closed-end fund, which is an investment company that raises a fixed amount of capital through an initial public offering (IPO) and then trades on an exchange like a stock. After the initial IPO, no more shares are normally issued by the fund. Currently, there are approximately 480 closed-end funds trading on U.S. stock exchanges. Closed-end funds are actively managed and tend to charge higher fees than open-end funds or ETFs.
I was aware of three India focused ETFs (EPI, PIN and INDA) but I was curious about how much assets each of them had gathered, their expense ratios and performance over the last five years. Google’s new AI chatbot Bard proved useful and put together the following table for me.
The market price of a closed-end fund’s shares may differ from its Net Asset Value (NAV). If it trades above the NAV, it is said to be trading at a premium and if the market price is below its NAV, the fund is said to be at a discount. Discounts can widen significantly, offering investors the opportunity to purchase shares well below their NAV. A fund may be trading at a discount due to poor fund performance, improper management skills, or lower distribution levels relative to peers or to market expectations.
Closed-end fund premiums and discounts often tend to persist for long periods of time and often there has to be an external action that triggers a change in the premium or discount. The premium for The India Fund disappeared once the iShares and WisdomTree ETF became available. I also recollect the The Herzfeld Caribbean Basin Fund (CUBA) trading at a big premium after the Obama administration attempted to normalize relations with Cuba.
A fund that it trading at a large discount to NAV can also attempt to collapse that discount by buying back its own shares and that is exactly what the Highland Income Fund (HFRO) is attempting to do. The fund was trading at a deep discount of 36.87% ( as of May 22, 2023) to its NAV and presents an interesting opportunity.
HFRO is a closed-end fund managed by NexPoint Asset Management, L.P, an SEC-registered investment adviser. It has $912.83 million in Assets Under Management (AUM). HFRO is a hybrid fund that has both debt and equity holdings.
On May 17, 2023, HFRO approved a repurchase program pursuant to which the fund may repurchase up to $100 million of its shares in open-market transactions over a two-year period. This represents around 17.5% of its market cap at announcement. Along with the repurchase program, the Board approved modifications to the fund’s investment objective. Under the modified investment objective, HFRO will pursue growth of capital along with income. It will change its name to the Highland Opportunities and Income Fund to reflect the new investment objective. All changes will be effective from June 15, 2023.
Another fund, The Taiwan Fund, Inc. (TWN) also announced a 10% share buyback recently. TWN also currently trades at a discount of 17.7% to its NAV as of May 22, 2023.
HFRO – Portfolio:
Source: HFRO – Fact Sheet (March 31, 2023)
HFRO has a portfolio with 107 holdings in all as of March 31, 2023. The fund is overweight real estate, which comprises about 71.4% of the total portfolio. The top two positions make up almost 21% of the fund. Among them, there are several NexPoint investments. That includes NexPoint Homes, NexPoint Real Estate Finance, Inc. (NREF), NHT Convertible Promissory Note, NexPoint Storage Partners, and NEXLS LLC.
Five of the top ten names are affiliated investments through NexPoint, with NexPoint Asset Management as HFRO’s fund sponsor. It is important to keep in mind that the fund’s investments have the same management as the fund itself. The fund has a few outsized positions with IQHQ Inc., a private REIT and CCS Medical, a leading national distributor of home medical equipment and supplies.
The fact that the fund has significant concentration in real estate and has exposure to private REITs starts to explain why the fund trades at a big discount to NAV.
Source: HFRO – Fact Sheet (March 31, 2023)
Cash Distributions:
CEFs are designed with the goal of providing attractive, regular distributions. HFRO is no different. The fund has been offering a monthly dividend of $0.077 for several years. The fund has been remarkably consistent about this payout since December 2017, although it tended to vary a great deal prior to that date. HFRO has grown dividends at a CAGR of almost 15% over the past 5 years. With an annual payout of $0.92 and a dividend yield of 10.92%, this fund looks attractive at the surface. It is always important to dig deeper into these funds to make sure distributions are adequately covered by income and are not simply return of capital.
Share Repurchase:
In March 2022, HFRO completed a $40 million common share buyback program repurchasing shares at a weighted average price per share of $11.32 over a six month period. The current $100 million share repurchase program was announced shortly after the fund was trading at the largest discount to NAV (42.03% on May 11, 2023) in the last ten years.
Credit Suisse Case:
HFRO and NexPoint sued Credit Suisse in 2013 for fraud and were awarded $121 million, consisting of damages and prejudgment interest on June 28, 2021. The case was related to the “inflated appraisal of a residential real estate project near Las Vegas shortly before the 2007 housing financial crisis.”
The following month Credit Suisse appealed this decision and earlier this year part of the damages awarded to Claymore Holdings, the entity set up by HFRO and NexPoint for this case, were reversed and the case was sent back to the trial court.
Conclusion:
The history of HFRO, which originally started out as an open-end fund, the massive discount to NAV and the Credit Suisse case all make for a complex but fascinating situation that is worth exploring further in light of this buyback announcement.
With the earnings season coming to an end, buyback activity declined significantly with 15 announcements compared to 24 in the prior week. These numbers will continue trending lower in the upcoming weeks.
Welcome to edition 60 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.
1. eXp World Holdings, Inc. (EXPI): $8.84
On May 17, 2023, the Board of Directors of this cloud-based real estate brokerage services provider authorized an additional $500 million share repurchase program, equal to around 23% of its market cap at announcement.
| Market Cap: $2.38B | Avg. Daily Volume (30 days): 706,199 | Revenue (TTM): $4.44B |
| Net Income Margin (TTM): 0.18% | ROE (TTM): 3.21% | Net Cash: $121.91M |
| P/E: 305.91 | Forward P/E: 117.23 | EV/EBITDA (TTM): 162.23 |
2. Highland Funds I – Highland Income Fund (HFRO): $8.28
On May 17, 2023, the Board of Trustees of this close-ended fixed income mutual fund authorized a new $100 million share repurchase program, equal to around 17.5% of its market cap at announcement.
3. ProPetro Holding Corp. (PUMP): $7.7
On May 17, 2023, the Board of Directors of this oilfield services company authorized a new $100 million share repurchase program of the company’s Class A common stock, representing around 12% of its market cap at announcement.
| Market Cap: $887.28M | Avg. Daily Volume (30 days): 1,439,476 | Revenue (TTM): $1.42B |
| Net Income Margin (TTM): 1.33% | ROE (TTM): 2.07% | Net Debt: $1.68M |
| P/E: 43.53 | Forward P/E: 4.53 | EV/EBITDA (TTM): 4.20 |
4. United Maritime Corp (USEA): $3.01
On May 22, 2023, the Board of Directors of this shipping company approved an additional $3 million share repurchase program, equal to around 11.25% of its market cap at announcement.
| Market Cap: $26.75M | Avg. Daily Volume (30 days):47,230 | Revenue (TTM): N/A |
| Net Income Margin (TTM): N/A | ROE (TTM): N/A | Net Debt: N/A |
| P/E: N/A | Forward P/E: N/A | EV/EBITDA (TTM): 0.29 |
5. Dillard’s, Inc. (DDS): $281.69
On May 20, 2023, the Board of Directors of this retail store operator authorized a new $500 million share repurchase program, equal to around 10.5% of its market cap at announcement.
| Market Cap: $4.73B | Avg. Daily Volume (30 days): 184,126 | Revenue (TTM): $6.97B |
| Net Income Margin (TTM): 12.09% | ROE (TTM): 52.7% | Net Cash: $392.50M |
| P/E: 5.90 | Forward P/E: 9.46 | EV/EBITDA (TTM): 3.41 |
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