Virtus AIO CEF: Spotting A Recovery, High Risk Remains

The Virtus Fund for Artificial Intelligence and Technology (NYSE: AIO) is a closed-end fund that makes use of leverage in a extremely speculative area of interest of the worldwide fairness and bond markets. Rising rates of interest do not simply trigger issues with steeper borrowing prices for the AIO administration staff, however the fund’s high-cost property are additionally struggling. Finally, the CEF’s hybrid and stuck revenue positions are additionally harmed by increased yields. But is sufficient bearish information now priced in? Let’s dive into AIO.

According to Virtus Investment Partners, AIO goals to generate a secure revenue stream and development of capital by specializing in one of the crucial vital long-term secular development alternatives in markets right this moment. The fund invests in a mixture of securities issued by synthetic intelligence corporations and in different corporations that profit from synthetic intelligence and different know-how alternatives.

As of October 31, 2022, AIO had internet property beneath administration of $662.4 million with $130 million in debt for a complete managed property determine of $792.4 million. The CEF pays a month-to-month dividend with a present market value unfold charge of 10.94% whereas its NAV payout charge is 9.33%. It has a gradual dividend of $0.15 monthly this yr. Importantly, the fund has a really excessive internet expense ratio of 1.74%, so I’d relatively go for cheaper thematic ETFs.

Its trailing 12-month price-to-earnings ratio is excessive at 23.4, though its earnings development is strong. From a buying and selling perspective, the common quantity is low, averaging beneath 140,000 shares.

AIO: Portfolio Fundamentals & Trading Statistics

The cause AIO has such a excessive annual expense ratio is that it actively buys and sells varied sorts of securities on leverage. Convertible bonds and high-yield debt are sometimes illiquid at occasions, particularly throughout market turmoil and volatility.

AIO: A Hybrid CEF

Prospective traders must also understand that the debt a part of AIO’s portfolio seems relatively speculative, so there’s little ballast from the bond a part of the fund.

Bond Allocation: Low Grade Debt

AIO’s prime holdings are home blue-chips equivalent to UnitedHealth Group ( UNH ), Deere & Co ( DE ), McDonald’s ( MCD ) and Microsoft ( MSFT ). But the highest 10 positions additionally embrace different aggressive know-how bets. In whole, rate-sensitive data know-how sector shares and credit score make up a excessive 46% of AIO. Overall, this space ought to do properly if we see a drop in rates of interest, however world development dangers might additional harm know-how.

A technology-heavy portfolio

The Technical Survey

AIO began falling decrease a yr in the past when so many speculative and long-dated property disappeared. By the time the S&P 500 hit its solely 2022 all-time excessive, the CEF was already in its withdrawal. Key assist close to $25 was damaged, and the downtrend didn’t cease till the broad market low in June (when the bond market additionally hit a short-term backside). However, the June nadir got here on bullish RSI divergence, and the fund staged a powerful summer season rally. However, that short-term achieve evaporated, and AIO hit a brand new year-to-date low in October, nevertheless it additionally hit bullish RSI divergence.

Now right here we’re at $17 – between the 50-day transferring common and the descending 200-day transferring common. I see near-term resistance at $19 – the August peak and close to the early June retracement excessive. If the fund can climb above that, there actually is not a lot stopping it by way of total provide from getting again to the $25 value level. I’d get lengthy shares at an in depth above $19. However, it is a holdover till then. For those that are at present lengthy, I’d have a promote cease order beneath the $14.92 October low.

AIO: Stocks publish a backside, look to upside targets

The Bottom Line

This AI fund, which invests in convertibles, frequent shares and high-yield debt, is an aggressive method to search yield. The fund’s excessive expense ratio, like many closed-end funds that use leverage, is a serious concern in my opinion. I like how the downtrend seems to have damaged, however the chart nonetheless has work to do technically, and I stay skeptical from a elementary/value perspective.