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Six Reasons to Like the Morgan Stanley Emerging Market Domestic Debt Fund

by: George Spritzer September 09, 2008 | about stocks: EDD    
George Spritzer

George Spritzer

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Yesterday I purchased some shares of the Morgan Stanley Emerging Market Domestic Debt Fund (EDD) at 14.06. EDD is a closed end fund that primarily invests in emerging market domestic debt or debt obligations of issuers located in emerging market countries that issue debt in their local currency. Some of their top holdings are in Brazil, South Africa, Hungary, Egypt, Turkey and Mexico. This was the top 10 country breakdown as of June 30, 2008.

 

Brazil27.02%
Hungary18.07%
Mexico17.49%
South Africa12.45%
Indonesia11.17%
Turkey10.33%
Thailand9.25%
Colombia6.68%
Egypt6.55%
Russia3.38%

Here are some reasons I like EDD now:

  1. At Friday’s close, the discount to NAV was 15.50% which is at the higher end of its range. I suspect the discount may widen further.
  2. The fund is relatively new. It was issued in April, 2007 at $20 a share. I believe tax loss selling by initial investors is causing much of the recent widening of the discount. But generally this selling is often met by bargain hunters when the discount to NAV goes much higher than 15%.
  3. EDD uses modest leverage of about 21% which adds to the yield. In their last report, the borrowing cost was about 4%.
  4. The current distribution rate is over 14%. This is attractive when the discount is high, if you own EDD in a tax deferred account.
  5.  After yesterday's FNM/FRE news, I have become longer term bearish on the US dollar. EDD’s bond holdings are denominated in local emerging market currencies, so it will benefit from a weak dollar.
  6. The discount is wide enough that the fund could easily attract activist investors who will try to open-end it or significantly narrow the discount to NAV.


Full Disclosure: I am long shares of EDD.

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This article has 14 comments:

  •  
    Sep 09 09:46 AM
    An additional consideration for value investors is that in the last year the net asset value has increased 5.17% while the share value has fallen 10.27%. For the last three months, NAV is off 1.45% while the share value is off 17.18%. It will take a lot of gain in the share price to bring the share price closer to the underlying value.
    Reply
  •  
    Sep 09 09:55 AM
    One way to look at this is that this fund is the ONLY
    way to buy emerging market debt denominated in local currency at a large discount to NAV. Certainly one cannot do this in Pimco's or Fidelity's open-end offerings. That being said, the discount is so large,
    it is clear retail investors haven't the foggiest of idea
    what role emerging market debt should play in their
    portfolios management.
    Reply
  •  
    Sep 09 10:10 AM
    All the things you're saying were also true (and were being said) when EDD traded at 18, except the yield was a little lower. The EDD share price has dropped because NAV has dropped. The dividends haven't compensated for half the loss of someone buying at 18 a year ago. What people miss about EDD is that it does not represent a true diversification from the US market, as emerging markets are highly dependent on a healthy US economy and also benefit from a strong dollar in terms of trade. Long term holders of EDD are feeling a lot of pain and there's no reason to think it won't continue.
    Reply
  •  
    Sep 09 12:34 PM
    Based on the comment above, I rest my case.
    Reply
  •  
    Sep 09 04:24 PM
    EDD is cheap here and good speculative investment, but it is certainly not an appropriate investment for highly risk averse investors (e.g. widows and orphans). Nowadays almost no fixed income investment is completely safe except maybe FDIC guaranteed CD's (below 4100K) or US Savings bonds.
    Reply
  •  
    Sep 11 04:52 PM
    The idea that FDIC is safe is a sad manifestation of our dwindling opportunities to save without loss of purchasing power, government fiat [the U.S. govt is the world's biggest debtor] and they have the greatest incentive to lower short rates, which usually impacts the dollar negatively. EDD is a good way to hedge such conflict and get a bounce on valuations for the foregoing reasons.
    Reply
  •  
    Sep 12 03:40 PM
    So...when you're holding EDD shares bought at 20 and kicking yourself for hanging on....is it time to sell and take the loss...or stick with EDD and collect the distributions?? Am not a widow, but am retired and can't believe I own this CEF.
    Reply
  •  
    Sep 13 09:00 AM
    Gladys....it's so low now, I think you'll kick yourself if
    you sell it here. I'd wait for a bounce to $15 or so,
    then sell it for the tax loss, and repurchase it 30 days
    later and keep it for the long haul. At $13.35, it's
    an almost unbelievable bargain. If it was a standard
    open end mutual fund it would easily worth the $16.63
    you'd have to pay for it today considering the long
    term prospects and the distribution yield.
    Reply
  •  
    Sep 13 05:42 PM
    There are other CEF holding EM debt in local currencies (eg AWF), so EDD is not the only choice. EDD suffered from the downgrade by its own parent (Morgan Stanley), who may be right about the strength, or lack thereof, of EM currencies.

    Nevertheless, in a well diversified portfolio, these CEF may have a place. EDD is probably as good as most and is particularly attractive at current discount and distribution rate. JMO
    Reply
  •  
    Sep 22 08:39 AM
    >There are other CEF holding EM debt in local currencies (eg AWF), so EDD is not the only choice<

    Utter nonsense...AWF is 86% US dollar denominated
    Reply
  •  
    Sep 23 11:03 AM
    They seem to have a big holding in a country just before it runs into trouble. July 1 2008 above it was Brazil now Brazil is cooling. Before it was Turkey and South Africa . I have not checked it out month by month it just seems to be that way. Anybody follow it more closely?
    Reply
  •  
    Sep 23 04:43 PM
    I have participated in both of EDD's recent conference calls. People are not happy given the big discount to NAV but I believe in the managers of this fund. Since it came out including distributions you haven't lost money. In this environment, as Martha Stewart might say: "That's a good thing".
    Reply
  •  
    Oct 12 07:38 PM
    I note that between the end of July and the end of August there was a jump from one Credit Swap with C to several swap purchases with JP Morgan Chase. Are these investments at a higher risk than the overall portfolio.
    Reply
  •  
    Nov 20 02:32 PM
    Wow, EDD at 7.5. Goes to show what happens if you take advice from someone on a stock blog posting as the_pig_man.
    Reply
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