MSD: Emerging Markets Exposure And A Fully Covered 11.63% Yield

seekingalpha06-09

PonyWang The Morgan Stanley Emerging Markets Debt Fund (NYSE:MSD) is a closed-end fund that income-focused investors can employ as a method of achieving their goals. On the surface, the fund manages ...

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On the surface, the fund manages ...</p>\n\n<a href=\"https://seekingalpha.com/article/4698243-msd-emerging-markets-exposure-and-fully-covered-11-63-percent-yield\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>MSD: Emerging Markets Exposure And A Fully Covered 11.63% Yield</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; 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\">\nMSD: Emerging Markets Exposure And A Fully Covered 11.63% Yield\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-09 20:32 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4698243-msd-emerging-markets-exposure-and-fully-covered-11-63-percent-yield><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>PonyWang The Morgan Stanley Emerging Markets Debt Fund (NYSE:MSD) is a closed-end fund that income-focused investors can employ as a method of achieving their goals. On the surface, the fund manages ...</p>\n\n<a href=\"https://seekingalpha.com/article/4698243-msd-emerging-markets-exposure-and-fully-covered-11-63-percent-yield\">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":"BK4588","symbol_name":"碎股","start_time":0,"source_url":"https://seekingalpha.com/article/4698243-msd-emerging-markets-exposure-and-fully-covered-11-63-percent-yield","article_id":"2442850995","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/169961097/image_169961097.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2442850995","pubTimestamp":1717936328,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"PonyWang The Morgan Stanley Emerging Markets Debt Fund (NYSE:MSD) is a closed-end fund that income-focused investors can employ as a method of achieving their goals. 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On the surface, the fund manages to do very well at this task, as its 11.63% yield certainly compares very well with its peers:   Fund Name Morningstar Classification Current Yield   Morgan Stanley Emerging Markets Debt Fund Fixed Income-Taxable-Emerging Market Income 11.63%   Templeton Emerging Markets Income Fund (TEI) Fixed Income-Taxable-Emerging Market Income 10.61%   Virtus Stone Harbor Emerging Markets Income Fund (EDF) Fixed Income-Taxable-Emerging Market Income 12.81%   Western Asset Emerging Markets Debt Fund (EMD) Fixed Income-Taxable-Emerging Market Income 10.72%   Morgan Stanley Emerging Markets Domestic Debt Fund (EDD) Fixed Income-Taxable-Emerging Market Income 7.56%   Click to enlarge As we can clearly see, the Morgan Stanley Emerging Markets Debt Fund is the second-highest-yielding fund in the category. This is not a very large category, either, as CEF Connect and CEF Data both only list these five closed-end funds in the entire emerging market fixed-income category. I seem to recall there being far more of these funds several years ago, so the demand for them must have declined, considering that the United States outperformed most foreign markets over the past ten years. Aside from there being very few funds in the category to choose from, the Morgan Stanley Emerging Markets Debt Fund only pays its distributions quarterly, and they are not consistent, so many income-focused investors may not be particularly attracted to this fund. As I just mentioned, emerging markets generally underperformed the United States over most of the past ten years. As we can see here, the J.P. Morgan EMBI Global Core Index (EMB) declined by 22.32% over the past ten years. While American investment-grade bonds (AGG) also declined over the period, the price decrease was not nearly as severe: Seeking Alpha Emerging market bonds did manage to outperform when we look at total return though, but with far more volatility: Seeking Alpha This may explain why the demand for emerging market investments in general seems to be much lower today than it was back during the first decade of the 21st century. It is certainly harder to find emerging market-focused instruments today than it was fifteen or twenty years ago. For its part, though, the Morgan Stanley Emerging Markets Debt Fund has had the same sort of performance as the broader emerging markets bond index. Over the past five years, the fund's share price has fallen by 22.84%. That is worse than the U.S. Aggregate Bond Index: Seeking Alpha Thus, the fund's recent share price performance has certainly not made it particularly appealing in the eyes of most income-focused investors. This is particularly true when we consider that most income-focused investors are fairly risk-averse, so they will generally not like to see anything decline in price over a five-year period. Admittedly, though, pretty much every bond fund has declined over the period due to the shift by central banks all over the world from a low-interest rate regime to one in which interest rates are at least somewhat positive (although still not necessarily beating inflation on an after-tax basis). This fact might make it a bit easier to stomach the fact that the Morgan Stanley Emerging Markets Debt Fund has suffered from a declining share price over time. However, as I pointed out in a recent article about one of this fund's peers: A simple look at a closed-end fund's share price performance does not necessarily provide an accurate picture of how investors in the fund did during a given period. This is because these funds tend to pay out all of their net investment profits to the shareholders, rather than relying on the capital appreciation of their share price to provide a return. This is the reason why the yields of these funds tend to be much higher than the yield of index funds or most other market assets. As such, we need to include the distributions that were paid out by the Morgan Stanley Emerging Markets Debt Fund in order to see how investors in this fund actually did over the past five years. When we do that, we get this alternative chart: Seeking Alpha As we can see, shareholders in the Morgan Stanley Emerging Markets Debt Fund actually made 10.13% on their money over the past ten years. Admittedly, that is a pretty terrible total return for any five-year period, but it is still far better than what investors in either of the two indices received. In fact, investors in the J.P. Morgan EMBI Global Core Index barely broke even over the period, while investors in American investment-grade bonds actually lost money. This certainly explains why bonds in general have earned a bad reputation from certain circles of the investment community in recent years. It also speaks very well to the Morgan Stanley Emerging Markets Debt Fund, as it has managed to earn money during a very challenging period overall. In a few recent articles, I have begun discussing how emerging market bonds may be poised for outperformance compared to domestic bonds over the coming years. This trend should also benefit this fund and thus result in it delivering a performance that will satisfy investors going forward. After all, just because the fund has not performed well over the past five years does not mean that it cannot perform well over the coming five years. Let us have a closer look at the Morgan Stanley Emerging Markets Debt Fund and try to determine if it makes any sense to purchase it today. About the Fund According to the fund's website, the Morgan Stanley Emerging Markets Debt Fund has the primary objective of providing its investors with a very high level of current income. This makes sense given the fund's strategy, which is explained in great detail on the website: We seek as a primary investment objective to produce high current income and as a secondary objective to seek capital appreciation by investing in a range of sovereign, quasi-sovereign and corporate debt securities in emerging markets, which may include U.S. dollar-denominated, local currency, and corporate debt securities. We believe that emerging markets experiencing positive fundamental change may present attractive investment opportunities for investors. To help achieve its objective, we combine top-down country allocation with bottom-up security selection. As clearly stated, the Morgan Stanley Emerging Markets Debt Fund invests its assets in debt securities issued by entities in emerging markets. This is why the current income objective makes sense, as bonds do not deliver any net capital gains over their lifetimes. All of the net investment returns are delivered via the coupon payments that the bond makes to its owner. In this case, that owner is the fund. It is, however, true that bond prices change inversely to interest rates, so it can be possible to make a profit trading them prior to maturity. This fund certainly looks to be taking advantage of that fact, as it had a 116.00% annual turnover in the full-year 2023 period. As we can see here, that is considerably higher than any of the fund's peers possess:   Fund Name Annual Turnover   Morgan Stanley Emerging Markets Debt Fund 116.00%   Templeton Emerging Markets Income Fund 48.95%   Virtus Stone Harbor Emerging Markets Income Fund 76.00%   Western Asset Emerging Markets Debt Fund 54.00%   Morgan Stanley Emerging Markets Domestic Debt Fund 56.00%   Click to enlarge (all figures are as of the most recent annual report for each of the respective funds) As we can clearly see, the Morgan Stanley Emerging Markets Debt Fund has by far the highest turnover of any of its peers. In theory, that should result in the fund having higher expenses due to the costs of the additional trading activity. However, that is not the case here as the fund only has a 1.34% fee: CEF Connect This is pretty reasonable compared to peers:   Fund Name Baseline Expense Total Expense   Morgan Stanley Emerging Markets Debt Fund 1.34% 1.34%   Templeton Emerging Markets Income Fund 1.21% 2.30%   Virtus Stone Harbor Emerging Markets Income Fund 2.11% 3.70%   Western Asset Emerging Markets Debt Fund 1.36% 3.74%   Morgan Stanley Emerging Markets Domestic Debt Fund 1.41% 2.32%   Click to enlarge (Total expense is baseline expense plus the carrying costs of the leverage that is employed by the fund. The Morgan Stanley Emerging Markets Debt Fund does not employ leverage, so its baseline and total expenses are the same.) As we can see, the Morgan Stanley Emerging Markets Debt Fund has the lowest total expenses of all of its peers after including leverage carrying costs, which actually account for a substantial portion of the expenses that are incurred by these funds. However, the fund's 1.34% expense ratio is still higher than that of most index funds. Overall, it does not appear that it has hurt it in terms of performance. As we saw in the introduction, investors in the Morgan Stanley Emerging Markets Debt Fund have managed to beat the emerging markets debt index over the past five years. This is also one of only three emerging market debt closed-end funds to have delivered a positive total return over the trailing five-year period: Seeking Alpha The three emerging market debt funds that actually managed to make money for their investors over the period are the two Morgan Stanley funds and the Western Asset Emerging Markets Debt Fund. The top two performers were the Morgan Stanley Emerging Markets Debt Fund and the Western Asset Emerging Markets Debt Fund, which were very comparable in terms of total return. As the Morgan Stanley Emerging Markets Debt Fund has a higher yield of the two, it might prove appealing to an investor whose primary goal is to maximize the level of income that they receive from their portfolio. Clearly, however, we can see that neither the fund's high turnover nor its high expense ratio compared to most exchange-traded funds has hurt its investors one bit, and ultimately that is the most important thing for us. As mentioned in the introduction, the Morgan Stanley Emerging Markets Debt Fund invests in sovereign, quasi-sovereign, and corporate debt issued by governments and corporations in emerging market nations. For the most part, though, the fund's emphasis is on government obligations. We can see this here: Morgan Stanley As we can see, as of April 30, 2024, the Morgan Stanley Emerging Markets Debt Fund had 68.61% of its net assets invested in sovereign bonds. It had another 4.16% of its net assets invested in quasi-sovereign bonds. I will admit that I am somewhat uncertain whether we should consider quasi-sovereign securities government bonds or corporate bonds. In a previous article, I quoted an article by M&G Investments that provided a definition of quasi-sovereign bonds:  While the definition varies across market participants, an entity or company is typically defined as 'quasi-sovereign' if a government owns more than 50% of the company's voting rights. Historically, developing countries have been using quasi-sovereign issuance to fulfill policy function, develop the hard currency corporate debt market, or promote international expansion of leading domestic players. As of the end of June 2015, there were about 170 quasi-sovereign issuers in emerging markets, more than 60 of which were fully owned (such as Petroleos Mexicanos, or Pemex, in Mexico) or issued bonds explicitly guaranteed by their respective governments (for example, Magyar Exim Bank in Hungary).  In that article, I likened these securities to Fannie Mae or Freddie Mac agency securities in the United States, and in a sense they are. The companies that issue these securities fulfill some needs that the government of a given country thinks the nation needs but are not being fulfilled by the private sector. A company like Amtrak in the United States might be a good example here, although many quasi-sovereign companies are profitable in their own right and do not require constant funding from the government. Equinor (EQNR) in Norway, for example, would be a quasi-sovereign company as the Norwegian state owns 67% of the company's voting equity, but the company is profitable in its own right and is not receiving subsidies from its governmental owner. The debt securities that are issued by these companies are thus backed mostly by the company's own cash flow. As we see from the example of Magyar Exim Bank though, in some cases, a government explicitly guarantees these securities. In that case, the default risk is probably about the same as that of an actual government bond. If we consider that quasi-sovereigns are frequently backed by governments, we have 72.77% of the fund's net assets invested in government-backed securities. As we all know, these are usually safer than corporates because of the ability of governments to tax or otherwise take the money to cover their obligations from their citizens. This is not always going to be the case, and we have seen governmental defaults in emerging markets over the years (Russia and Argentina both come to mind, but there have been others), but in theory, these securities should have lower default risk than corporates. Thus, the fact that the fund is mostly invested in government securities should provide a certain peace of mind. The fund also does not have particularly high exposure to any individual nation. We can see this very quickly by looking at the fund's holdings by geography: Morgan Stanley As we can see, there is no individual country whose securities represent more than 3.70% of the fund. This is fairly nice to see from a risk-management perspective. As we have discussed before, the majority of emerging nations have benchmark interest rates that are substantially higher than those in most developed nations. Here are the benchmark interest rates for each of the nations shown in the chart above:   Country Benchmark Interest Rate   Brazil 10.50%   Mexico 11.00%   Turkey 50.00%   Indonesia 6.25%   Argentina 40.00%   Philippines 6.50%   Hungary 7.25%   China 3.45%   Venezuela 58.98%   Click to enlarge With the exception of China, we can see that all of these countries have benchmark rates well above the 3.70% of net assets represented by the largest country whose securities are included in this portfolio. That should mean that a default by any individual country will be erased by the coupon payments from the remaining bonds in the portfolio in only a few months. This should provide some comfort to investors who are worried about risks. With that said, the benchmark interest rates for each country are the local currency interest rate and may not be representative of the interest rate that they will actually pay on bonds denominated in U.S. dollars. However, the fund's portfolio as a whole still has an average coupon yield of 6.67%, so my above comments should still apply. In short, any individual default will be erased by the coupon payments from the remaining bonds in only a few months. Leverage The Morgan Stanley Emerging Markets Debt Fund does not currently employ leverage. However, its annual report does state that it has the ability to do so. From the annual report: The Fund is permitted to borrow money or issue debt securities in an amount up to 33 1/3% of its managed assets (50% of its net assets), issue preferred shares in an amount up to 50% of its managed assets (100% of its net assets) and enter into reverse repurchase agreements or other derivative instruments with leverage embedded in them to the maximum amount permitted by the SEC and/or SEC staff rules, guidance, or positions. The Fund may seek to use financial leverage through borrowings from certain financial institutions or other means, and the Fund may at times not seek to use financial leverage. Borrowings create leverage, which is a speculative characteristic. Although the Fund is authorized to borrow, it will only do so when the Adviser believes that borrowing will benefit the Fund after taking into considerations such as the costs of the borrowing and the likely investment returns on the securities purchased with borrowed monies. The extent to which the Fund will borrow will depend upon the availability of credit. No assurance can be given that the Fund will be able to borrow on terms acceptable to the Fund and the Adviser. Thus, the Morgan Stanley Emerging Markets Debt Fund might choose to use leverage under certain circumstances, so obviously anyone who purchases this fund today might wind up owning a leveraged vehicle at some point in the future. That would increase the fund's volatility considerably, although it would also probably boost its yield. This fund is alone in rejecting the use of leverage right now, as all of its peers are using some:   Fund Name Leverage Ratio   Morgan Stanley Emerging Markets Debt Fund 0.00%   Templeton Emerging Markets Income Fund 14.77%   Virtus Stone Harbor Emerging Markets Income Fund 24.70%   Western Asset Emerging Markets Debt Fund 28.86%   Morgan Stanley Emerging Markets Domestic Debt Fund 12.15%   Click to enlarge (all figures from CEF Data) The fund's authorized level of leverage is quite a bit higher than any of its peer funds currently possess. However, the fact that the fund is not currently using leverage suggests that management is fairly cautious, as it made no effort to borrow money to capitalize upon the strong performance that emerging market bonds have delivered since November: Seeking Alpha Thus, in most cases, we can probably assume that the fund's leverage will remain relatively conservative and will not be enough for us to worry about. Distribution Analysis The primary objective of the Morgan Stanley Emerging Markets Debt Fund is to provide its investors with a high level of current income. To this end, the fund pays a quarterly distribution of $0.2100 per share ($0.84 per share annualized). This gives the fund an 11.63% yield at the current share price. As we saw in the introduction, this is a reasonably attractive yield compared to the fund's peers. Unfortunately, the fund's distribution has not been particularly consistent over its history: CEF Connect As we can see, the fund's distribution frequently varies from quarter to quarter. The website itself admits this: Morgan Stanley As we can see here, the fund's distribution has changed in every quarter dating back to 2022. That is something that is likely to reduce the fund's appeal in the eyes of many income investors. After all, many of us are trying to invest in things that will provide us with the income that we need to pay our bills and support ourselves. However, the website implies that all this fund is doing is paying out its net investment income. This is generally what we would like to see from a fixed-income fund, even if it does result in a variable distribution. However, it is difficult to see how an unleveraged fund can have such a high yield if its distributions are entirely financed by net investment income, so let us have a look at its financial statements. As of the time of writing, the most recent financial report for the Morgan Stanley Emerging Markets Debt Fund is the annual report that corresponds to the full-year period that ended on December 31, 2023. A link to this report was provided earlier in this article. I will admit that this is not as new of a report as I would have liked, as there are five months of market movements that will not be included in it, but for now, we have to go with what we have available. For the full-year period, the Morgan Stanley Emerging Markets Debt Fund received $14.635 million in interest and $289,000 in dividends from the securities in its portfolio. This gives it a total investment income of $14.924 million for the period. It paid its expenses out of this amount, which left it with $12.892 million available to shareholders. That was not sufficient to cover the $14.996 million that the fund paid out in distributions over the period. Fortunately, the fund was able to make up the difference through capital gains. For the full-year period, it reported net realized losses of $28.995 million, but these were more than offset by $33.094 million of net unrealized gains. Overall, the fund's net assets increased by $384,000 over the period. The fund's net assets would have increased by more than they did, but this fund paid $1.283 million over the period on buying back its own shares. If it had not done this, its net assets would have increased by $1.667 million. Overall, we can see that the fund managed to cover its distribution over the period, but it had to rely on unrealized capital gains to accomplish the task. The fact that this fund only covered its distribution due to unrealized gains is worrying. After all, these gains can be erased by a market decline if they are not realized. However, for now, everything seems to be okay. This chart shows the fund's net asset value since December 31, 2023: Barchart As we can see, the fund's net asset value has increased by 3.02% since the start of this year. This tells us that it has not seen its unrealized gains erased by the market and that overall, it has managed to produce higher investment profits year-to-date than it has distributed to the investors. For the most part, it does not appear that this fund is having any trouble covering its distributions. The variable distribution might not appeal to everybody, though. Valuation Shares of the Morgan Stanley Emerging Markets Debt Fund are currently trading at a 7.13% discount on net asset value. This is a bit worse than the 8.25% discount that the shares have averaged over the past month, so the current price is not as attractive as it typically is for this fund. Conclusion In conclusion, the Morgan Stanley Emerging Markets Debt Fund looks like a pretty good way to play the emerging market debt market right now. As I have discussed in a few recent articles, this is an area that investors may want to consider including in their portfolios as most emerging market nations have stronger government finances than developed countries and the U.S. dollar could decline against their currencies over the next several years. Funds such as the Morgan Stanley Emerging Markets Debt Fund should benefit from this and provide their shareholders with a high level of income at the same time. When we also consider that this fund is fully covering its distribution and trades at a reasonably attractive price right now, it could be worth considering.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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