MCI: Contains Junk Rated Debt That Outperforms The S&P In Total Return

seekingalpha04-06

Barings Corporate Investors is a closed-end fund that focuses on high-yielding corporate debt securities.MCI has outperformed the S&P 500 in total return since its inception in 1971, with a current ...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nMCI: Contains Junk Rated Debt That Outperforms The S&P In Total Return\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-06 18:24 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4682485-mci-contains-junk-rated-debt-outperforms-sp-total-return><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Barings Corporate Investors is a closed-end fund that focuses on high-yielding corporate debt securities.MCI has outperformed the S&P 500 in total return since its inception in 1971, with a current ...</p>\n\n<a href=\"https://seekingalpha.com/article/4682485-mci-contains-junk-rated-debt-outperforms-sp-total-return\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"VTI.AU","symbol_name":"Visioneering Tech","start_time":0,"source_url":"https://seekingalpha.com/article/4682485-mci-contains-junk-rated-debt-outperforms-sp-total-return","article_id":"2425652570","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/2003136158/image_2003136158.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2425652570","pubTimestamp":1712399052,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Well, MCI invests in long term debt obligations of companies that are primarily US based. MCI purchases these investments directly from their issuers, which is something not available to the public. The debt investments are usually made out to companies that have between small and middle market capitalizations. Most of the returns from these areas comes from the distribution since the fund practically distributes all of its earnings out toward paying the dividend. So just how risky is it to invest in this kind of fund?Well to understand that, we have to take a look at MCI's portfolio and strategy. Portfolio & Strategy MCI's portfolio composition primarily consists of private bank loans. These private bank loans make up over a third of the total portfolio composition, roughly 77%. The bulk of the remaining portfolio is comprised of private equity and private debt. The equity portion of the portfolio is important because this is what allows MCI to capture some upward price mobility in ad","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"VTI.AU":"Visioneering Tech","OEF":"标普100指数ETF-iShares","TSS":"Total System Services","BK4559":"巴菲特持仓","SPXU":"三倍做空标普500ETF","BK4585":"ETF&股票定投概念","BK4550":"红杉资本持仓","UPRO":"三倍做多标普500ETF","SPY":"标普500ETF","BK4581":"高盛持仓","BK4504":"桥水持仓","SPY.AU":"SPDR® S&P 500® ETF Trust","BK7126":"医疗保健用品","MCI":"Babson Capital Corporate Investors","VTI":"大盘指数ETF-Vanguard MSCI","OEX":"标普100",".SPX":"S&P 500 Index","IVV":"标普500指数ETF","SSO":"两倍做多标普500ETF","BK4588":"碎股","BK4534":"瑞士信贷持仓","SDS":"两倍做空标普500ETF","SH":"标普500反向ETF"},"translate_title":"MCI：包含垃圾级债务，总回报优于标准普尔","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"VTI.AU":1,"VTI":1,"TSS":1,"SPY.AU":1,"SPY":1,"MCI":1,"US2Y.BOND":0.9,"US12M.BOND":0.9,"US10Y.BOND":0.9,"US30Y.BOND":0.9,"US3Y.BOND":0.9,"US5Y.BOND":0.9,"US6M.BOND":0.9,"US7Y.BOND":0.9,"US912796CX52.BOND":0.6,"US912797FH58.BOND":0.6,"US912797FS14.BOND":0.6,"US912797GB79.BOND":0.6,"US912797GK78.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6,"US912797HG57.BOND":0.6,"US912797HH31.BOND":0.6,"UPRO":0.6,"ESmain":0.6,".SPX":0.6,"IVV":0.6,"OEF":0.6,"OEX":0.6,"SDS":0.6,"SH":0.6,"SPXU":0.6,"SSO":0.6},"content_text":"Barings Corporate Investors is a closed-end fund that focuses on high-yielding corporate debt securities.MCI has outperformed the S&P 500 in total return since its inception in 1971, with a current dividend yield of 8.7%.The fund's portfolio primarily consists of private bank loans and floating rate debt, allowing it to benefit from higher interest rates. However, the portfolio consists of junk-rated companies.The price currently trades at a slight premium to NAV of 2.5% but I believe this to still be a great entry point.   J Studios/DigitalVision via Getty Images Overview When most people think of Closed End Funds, they think of disgusting looking price charts that have gone down substantially over a large period of time. There are different kinds of closed end funds, each with their own respective focus and goal in mind. We have CEFs that focus on corporate debt, real estate, commodities, covered calls, and specialty credit for example. However, the fund we will be reviewing today focuses on corporate debt securities; high yielding bonds that are issued by corporations. Barings Corporate Investor (NYSE:MCI) breaks that stereotype with a beautiful performance since inception its inception in 1971. In fact, MCI has outperformed the S&P 500 (SPY) in total return since its inception. Even on a smaller time horizon of 3 years we can see the out performance. Therefore, we can conclude that something about MCI's formulated focus works well and makes this CEF stand out from the pack. Data by YCharts The fund's objective is to first prioritize current yield while also capturing opportunities for capital gains. The price has risen by more than 23% over a one year time frame. The current dividend yield is a high 8.7% and distributions are paid out on a quarterly basis. Due to the higher interest rate environment, the dividend has now grown to be larger than the pre-pandemic levels. So what exactly does MCI do in order to achieve such superior total returns? Well, MCI invests in long term debt obligations of companies that are primarily US based. MCI purchases these investments directly from their issuers, which is something not available to the public. The debt investments are usually made out to companies that have between small and middle market capitalizations. Most of the returns from these areas comes from the distribution since the fund practically distributes all of its earnings out toward paying the dividend. So just how risky is it to invest in this kind of fund? Well to understand that, we have to take a look at MCI's portfolio and strategy. Portfolio & Strategy MCI's portfolio composition primarily consists of private bank loans. These private bank loans make up over a third of the total portfolio composition, roughly 77%. The bulk of the remaining portfolio is comprised of private equity and private debt. The equity portion of the portfolio is important because this is what allows MCI to capture some upward price mobility in addition to the high level of distribution income. This equity portion is what contributes to the capital gains of MCI. We can see where this is beneficial if we look at the prior years' performance. For example, we can see that in 2021 the net investment income of $0.93/share was not enough to cover the distribution of $0.96/share. The additional gains of $1.67/share helped cover the distribution. The strategy here seems to work well since the price also rose nearly 23% between 2019 - 2023.   MCI 2023 Annual Report Most of their portfolio also consists of floating rate debt, approximately 71%. The remaining portion of these investments are made up of 13% equity and 12.4% fixed rate debt. This means that MCI has the ability to benefit from an environment with a higher average interest rate like the one we are currently in. A higher interest rate benefits MCI because this translates into a higher level of interest income they collect from the debt obligations. It also gives the fund ability to navigate in any economic cycle we are in. Whether the rate goes up or down, MCI will continue collecting interest, albeit lower during times of interest rate cuts. The Fed still remains indecisive on rate cuts and it seems likely that we will experience less cuts than the original 3-5 that was anticipated at the start of the year.   MCI 2023 Annual Report Part of the fund's strategy includes the usage of leverage. The level of leverage used is only around 10% of the net assets. More leverage can amplify the income received but simultaneously create an environment of higher volatility. Thankfully it seems like that has not been the case here for MCI. I do like the low volatility nature of the fund and this can also be partly attributed to the diverse nature. The largest sector that the fund is invested in is technology, making up about 26% of their portfolio. This is then followed by manufacturing at 13.4%, healthcare at 8.3% and transportation services at 7.8%. We can see their top ten holdings below.   Barings It's always great to see expansions in the overall investment portfolio as well because that indicates to me that management is actively trying to adapt to current market conditions as well as grow the total investment income received. Over Q4 there were six new private placement investments within the portfolio alongside 23 additional add-on investments within existing portfolio companies totaling $9.8M in value. For the entire year of 2023, MCI grew its portfolio by closing on a total of 20 new private placement investment and 39 add-on investments towards existing portfolio companies. This translated into a total amount of $44.3M invested throughout the full year. Lastly, since this is an actively managed fund there are total expenses at 1.1% of the value of the net assets. We can see how their portfolio and strategy works. MCI actually outperforms the S&P (SPY) and Vanguard's Total Stock Market ETF (VTI) in total returns. Albeit, the majority of the returns from MCI come from the high distributions. Is this the most tax efficient way to achieve your total return? Probably not but that's not the point. Whether you get your return from capital appreciation or distributions, the math works out to be similar. An annual return of 10% from 8.5% price growth and a 1.5% dividend yield is the same as an annual return that comes from purely 10% distribution. Data by YCharts Risk Profile MCI does come with some inherent risks because of the space the fund operates in. These debt investments are usually privately placed and in the \"risky\" category of below investment grade companies, otherwise known as \"junk\". Simply put, the terms 'junk' or 'below investment grade' means anything rated below BBB-. Anything rated below BBB- means that the company can be speculative in nature and there is a higher chance of default on the debt. You see, with rates becoming so elevated as of recently, the main concern is that companies with the lowest credit ratings struggle with making interest payments or refinancing. In theory this increases the likelihood of default rates. However, data tells us that the default rates are actually not that dramatic in my opinion. Looking back at the worst time of 2009, the default rate of high yield bonds was 13.7%.   Fitch While this data is old, there are not many new sources of information out there that's easy to trace regarding the topic. I did manage to track down a recent source at Reuters that states junk rated corporate bonds with a credit rating of BB- and below has an average default rate of about 4%. Expected default rates of junk corporate bonds are projected to land between 4 -5%. For reference, the default rate in this category was only 2 - 3% for 2023. Therefore, this has to be a risk you are comfortable with taking. If the economy plunges into another deep recessions, we can see the default rates spike. Subsequently causing a decreased of NI (net investment income) for MCI. Dividend MCI has historically been able to successfully cover their distribution by a large margin. Taking a look at the full year results of 2023 shows us a total net investment income of $32,631,730. The total amount that was distributed our to shareholders in the form of a dividend was $28,771,641. This represents a distribution coverage of over 113%. Not only are they able to cover the distribution, but the total net investment income has also grown year over year.   MCI 2023 Annual Report As a result of this NII growth, the dividend was raised 2.7% back in December of 2023. Actually, MCI increased the dividend on four separate occasions throughout 2023 due to the high levels of net income. The largest raise taking place in May of 2023, amounting to a 14% raise. As of the latest declared quarterly dividend of $0.38 per share, the current dividend yield is 8.7%. Once again, I do believe this can be attributed to the higher interest rate environment that we are currently in. Higher interest rates equate to higher interest payments received on debt investments. As a result, the dividend CAGR (compound annual growth rate) over the last five year period is 3.42%. This is great for a closed end fund already yielding over 8%.   MCI 2023 Annual Report Something to consider before investing in a fund like MCI is that the high level of distributions is not tax friendly. We can see how all of the distribution last year was classified as ordinary income. Therefore, MCI may be best utilized in a tax advantaged account such as an IRA.   Portfolio Visualizer Lastly, MCI's strong performance and dividend growth resulted in a growing stream of dividend income over the last decade. Using Portfolio Visualizer, we can back test how an initial investment of $10,00 would have panned out. This assumption does not include any additional capital invested after the original $10,000 but it does include dividends being reinvested. As a result, your dividend income would have grown from $886 a year in 2010 up to a whopping $3,084 in 2023. Simultaneously, your position size would have ballooned up to a value of $39k from only dividends being reinvested and decent price growth along the way. Outlook & Valuation Even if the Fed does begin to cut interest rates this year, I believe they will ultimately be very mild. Jerome Powell stated that interest rate cuts will likely not be happening anytime soon. The current employment data remains strong and inflation needs to come back down near the 2% for the probability of rate cuts to increase. No matter what the verdict is, MCI has historically navigated rate sensitivity very well with very little price sensitivity happening. My guess is that the days of near-zero rates are in the rear view mirror. As a result I think that we'll see a higher interest rate environment become our new norm, which is closer to what's considered normal by the way. Data by YCharts While the price currently trades at a slight premium to NAV (net asset value) of 2.5%, I still believe MCI to be a buy. Although, I wouldn't blame you if you waited for a better entry point. This is because the price traded at a discount to NAV since the initial drop during the start of the pandemic in March 2020. The price traded at an average discount to NAV of 8.7% for the last three years. This would have been the best time to initiate a position. However, prior to 2020 the price did frequently trade at a slight premium to NAV. Looking back over the last decade we can see several instances where the price traded at a premium of more than 10%. Going back to 2016 the price actually traded at a premium of over 30%.   CEF Data While we would all rather initiate a position at a discount, the truth is that a slight premium of 2.5% really isn't that bad. Especially when you consider that the primary goal here is income generation and MCI has done just that. Regardless of where you initiate a position, MCI is likely to continue providing a high level of income that will benefit from this higher rate environment. Plus, you are able to offset an entry price you are unhappy with by simply reinvesting your dividend or adding additional capital during time where the price drops into the discount territory. Takeaway Barings Corporate Investors is a closed end fund that provides a high level of income and outperforming total return that is sourced from below-investment grade rated corporate debt. The fund earns its net investment income from the interest, dividends, equity, and capital gains of the portfolio holdings. The currently dividend yield is 8.7% and the total return has outperformed the S&P 500 due to the growing distributions and slight price appreciation over the years. While the income received is unfortunately classified as ordinary income, MCI has a great track record at growing the income it an produce within a portfolio.  While the price trades at a slight premium to NAV, the high quality management and historical data makes MCI a great choice for income investors. I wouldn't blame investors wanting to wait for a better entry however as the price frequently traded at a discount to NAV since the pandemic started.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2425652570"}