A High Quality Bond Portfolio That Could Be Well-Positioned For A Credit Event
Maybe
Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
The theme of the past two weeks has been the growing risk of a potentially imminent credit event, so you can imagine that I’m not a big advocate of income seekers pushing far out onto the duration or credit risk spectrums to find high yields. That makes it especially challenging to find an appropriate high yield fund for this space since so many products involve taking on extra risk. There are a few options out there, but any investment yielding 7-8% or more should be assumed to come with high risk that can be very damaging in a deteriorating economic environment. With Treasury bills earning nearly 5.5% today, it may be better to lock in this essentially riskless yield and call it a day, but that’s probably not why you’re here.
That’s why I want to look at the MFS Government Markets Income Trust (MGF). The name is a bit of a misnomer since it doesn’t invest exclusively in government securities, but the high credit quality profile could act as a safety value for investors should things begin breaking down. Is it the best option for safety? Perhaps not and there are certainly some holes you can poke through this portfolio. Yields in Treasuries, however, are topping out at around 5.5%, so MGF’s nearly 7-8% yield might actually present a good risk/reward tradeoff.
Fund Background
MGF’s investment objective is to seek high current income, but may also consider capital appreciation. It normally invests at least 80% of the fund’s net assets, including borrowings for investment purposes, in U.S. and foreign government securities, but it may also invest in other types of investment-grade quality debt instruments.
MGF is pretty much a no frills portfolio. It doesn’t use leverage or take on any degree of unnecessary risk. Its focus is almost entirely on higher quality from all around the world. Its expense ratio of 0.80% is quite low by closed-end fund standards. From a structural standpoint, this is as about a straightforward closed-end fund as you’ll find. One drawback I see is that the fund’s net asset base is just over $110 million. That’s not a lot and could lead to some issues in terms of liquidity and tradeability, but sometimes it’s just nice to see a fund that doesn’t overdo it with strategy or exposure. A lot of times, simpler is better.
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