Virtus AIO CEF: Spotting A Recovery, High Risk Remains

The Virtus Artificial Intelligence & Technology Opportunities Fund (NYSE: AIO) is a closed-end fund that uses leverage in a highly speculative niche of the global equity and bond markets. Rising interest rates don’t just cause problems with higher borrowing costs for the AIO management team, but the fund’s long-duration assets are also suffering. Finally, CEF’s hybrid and fixed income positions also suffer from higher yields. But is enough bearish news priced in now? Let’s dive into AIO.

Corresponding Virtus investment partnerAIO strives to generate a stable income stream and capital growth by focusing on one of the most significant long-term long-term growth opportunities in today’s markets. The fund invests in a combination of securities issued by artificial intelligence companies and other companies that could benefit from artificial intelligence and other technological opportunities.

As of October 31, 2022, AIO had net assets under management of $662.4 million with debt of $130 million for total assets under management of $792.4 million. The CEF pays a monthly dividend with a current market price payout rate of 10.94%, while its NAV payout rate is 9.33%. It has a steady dividend of $0.15 per month this year. Importantly, the fund has a very high net expense ratio of 1.74%, so I’d tend to go for cheaper thematic ETFs.

The 12-month stock price-to-earnings ratio is high at 23.4, although earnings growth is solid. From a trading point of view, the average volume is low, averaging under 140,000 shares.

AIO: Portfolio fundamentals and trading statistics

The reason AIO has such a high annual expense number is that it actively buys and sells multiple types of leveraged securities. Convertible bonds and high yield bonds are often illiquid at times, particularly during periods of market turmoil and volatility.

AIO: A hybrid CEF

Potential investors should also recognize that the debt issue in AIO’s portfolio appears fairly speculative, leaving the bond portion of the fund light on weight.

Bond allocation: low-grade debt

AIO’s top holdings are blue-chip household stocks such as UnitedHealth Group (UNH), Deere & Co (DE), McDonald’s (MCD) and Microsoft (MSFT). But the top 10 positions also include other aggressive tech bets. Overall, stocks and credit from the interest-rate-sensitive information technology sector account for a high 46% of AIO. Overall, this area should do well if we see interest rates falling, but global growth risks could hurt technology further.

A tech-heavy portfolio

The technical recording

The AIO started falling a year ago when so many speculative and long-dated assets dried up. When the S&P 500 hit its lone all-time high of 2022, the CEF was already in its drawdown. The key support near $25 was broken and the downtrend did not abate until the June broad market bottom (when the bond market also made a short-term bottom). However, the June nadir hit a bullish RSI divergence and the fund staged an impressive summer rally. However, those short-term gains evaporated and AIO marked a new yearly low in October, but that too was hit by bullish RSI divergence.

Now here we are at $17 – between the 50-day moving average and the falling 200-day moving average. I see near-term resistance at $19 – the peak in August and near the early June recovery high. If the fund can climb above that, there really isn’t much stopping it from returning to the $25 price point in terms of overhead supply. I would get long shares at a close above $19. But until then it’s a queue. For those currently long, I would have a sell stop order below the October low of $14.92.

AIO: Stocks bottom and turn to upside targets

The final result

This AI fund, which invests in convertible bonds, common stocks and high-yield bonds, is an aggressive way to generate returns. The fund’s high expense ratio, like many closed-end funds that use leverage, is a key concern, I think. I like how the downtrend appears to be broken, but the chart still has some technical work to do and I remain skeptical from a fundamental/cost perspective.