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An Emerging Market Debt Fund
that Pays Out 9.9% Annually |
Published:
July 14, 2008
The Western Asset Emerging Markets Debt Fund (NYSE: ESD, $16.98) invests in a portfolio of government
and corporate bonds issued by Brazil, Mexico, Russia, Turkey and
other emerging nations. The average credit quality is a notch
below investment grade at "BB," but over 40% of the portfolio
ranks as investment grade. More than a third of the assets are
in local currency, with the balance denominated in U.S. dollars.
This mix allows the fund to benefit from dollar weakness, while
also hedging against currency volatility. An average bond
duration of 6.25 years makes the fund moderately sensitive to
interest rates. ESD may trade derivatives to juice returns.
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Dividend: The fund introduced a managed
distribution policy in September 2007 and set its monthly
distribution rate at $0.14 per share. That gives ESD an
annual yield of 9.9%.
As noted above, payouts to date have come entirely from
investment income and capital gains. Given the fund's
substantial accumulated long-term capital gains, management
should be able to minimize return of capital payments in
future distributions.
That
said, paying out accumulated gains can grind
down the asset base in a similar manner to return of capital
payments. However, more than half the 2008 distributions through
August come from investment income and short-term capital gains
earned during the year.
Investors should note that certain accounting rules may result
in long-term capital gains distributions that are taxable as
ordinary income. Investment income and short-term capital gains
are also taxed at the ordinary income rate of up to 35%. As
such, ESD is best held in a tax-deferred account.
A dividend reinvestment plan is available and you can contact
the fund for more information by phoning 1-800-451-2010.
Performance: ESD has delivered average
annual returns of +5.7% over the past three years. The fund's
substantial holdings of emerging market debt denominated in
local currencies had a large positive impact on performance.
Many of these currencies appreciated significantly against the
weakening U.S. dollar.
Outlook/Valuation: With a portfolio that's
about 60% in U.S. dollars and 40% in local currency debt, the
fund is positioned to deliver solid returns even if the
greenback were to strengthen. An equivalent balance between
investment grade and high-yielding sub-investment grade holdings
should help ESD deliver a dose of both stability and high
returns.
As mentioned above, ESD tends to trade in a narrow discount
range. Currently selling at a discount of -14.5% to the value of
its underlying holdings, the shares are a bargain.
If
you're seeking the above-average yields offered by emerging
market debt and willing to take on a moderate degree of risk,
ESD may be just the ticket.
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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