MSD: Morgan Stanley Emerging Market Debt Fund at a Discount

Morgan Stanley Emerging Markets Debt Fund (ticker:MSD) is a closed-end fund that could appeal to income-oriented investors who want to diversify their US fixed income holdings. The fund invests in debt securities of government and other issuers located in emerging market countries. About 90% of the portfolio has a credit rating from BB- through BBB, although there are also some higher rated and lower rated issues.

MSD is currently trading at a 9.5% discount to NAV. It has appreciated quite a bit from the lows in 2009. But there is long term secular trend in place where emerging market debt securities are being viewed as safe havens. Unlike Japan or the US, emerging market nations generally have lower debt to GDP ratios. More emerging market nations have been getting reclassified as investment grade which means a greater percentage allocation from large institutions.

This was the MSD holdings mix as of June 30, 2010:

  • Sovereign Non-Brady 87.6%
  • Corporate Bonds 0.4%
  • Quasi-Sovereign 11.1%
  • Local Currency 13.4%
  • USD Forwards 2.3%
  • Cash -14.8% (leverage)
  • Other -0.05%

The top five geographic breakdown is:

  • Brazil 15.1%
  • Mexico 14.6%
  • Russia 14.0%
  • Turkey 11.8%
  • Indonesia 10.2%

Currency Exposure:

  • US Dollar 86.6%
  • Euro -10.2%
  • Turkish Lira 5.2%
  • South African Rand 5.1%
  • Polish Zloty 4.5%
  • Brazil Real  2.9%
  • Indonesia Rupiah  2.6%
  • Mexican Peso  2.5%
  • Russian Ruble  0.9%

MSD is moderately liquid with an average daily trading volume of over 76,000 shares a day. Its average credit quality is BB+.

Here are some other relevant statistics on the fund:

  • Pays quarterly distributions.
  • Total Net Assets: 449.8 MM
  • Total Common Assets: 427.0 MM
  • Expense ratio: 1.13% (excluding leverage costs)
  • Discount to NAV: -9.5%
  • Current yield: 8.56%   YTM= 8.04%
  • Distribution rate: 5.78% (no return of capital)
  • Leverage: 5.1%

Full Disclosure: Long MSD in some client accounts.


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