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Summary

  • KMM has good long-term NAV performance.
  • KMM offers attractive leverage cost and reasonable management fees.
  • Discount to NAV has widened over 18% in the last year.

The Deutsche Multi-Market Income Trust (NYSE:KMM) is a global fixed-income fund that seeks high current income and total return. It invests in a wide range of fixed-income securities including US corporate bonds, senior loans, private mortgage backed issuers, US Treasuries/agencies and foreign government debt/agencies.

The fund recently had a name change along with many other closed-end funds that changed "DWS" to "Deutsche". It was previously called DWS Multi-Income Trust, but there were no changes to the fund's objectives or strategy and the ticker remained the same.

The fund's portfolio manager is Gary Russell, CFA. Gary joined Deutsche Asset Management in 1996 and is currently head of US High Yield Bonds. He previously served as head of high yield in Europe and as an Emerging Markets portfolio manager. Prior to that, he spent four years at Citigroup as a research analyst and structured mortgage CMOs. He has an MBA from NYU Stern School of Business and a BS from the United States Military Academy (West Point).

KMM has had good long-term NAV performance averaging over 10% a year for the last 15 years. But over the past one year there has been a real disconnect between its NAV performance and its market price. Here are the one year performance figures for KMM as of August 18, 2014:

1- Year NAV Performance: +10.34%

1- Year Market Performance: -7.92%

Source: Morningstar

This is an astounding difference of over 18%. Of course, another way to express this performance difference is to note that KMM traded at a 9.89% premium on August 16, 2013, while it currently trades at a -8.74% discount.

Part of the reason why the discount has widened so dramatically is because of modest distribution cuts in December 2013 and March 2014. But for a total return investor, the wider discounts may provide a good entry point, since the fund's distribution has been both raised and lowered in the past.

The baseline expense ratio of 1.00% is quite reasonable and quite a bit lower than most of its peers. KMM actively uses interest rate swaps and other derivatives to manage its portfolio.

The cost of leverage is also fairly good. As of May 31, 2014, the weighted average annual borrowing cost was 1.16%. The fund has an effective duration of 4.65 years, so it has fairly low interest rate sensitivity.

Deutsche Multi-Market Income Trust

Total Net Assets: 365 Million

Total Common Assets: 247 Million

Baseline Expense ratio= 1.00%

Leverage: 32%

Annual Cost Of Leverage: 1.16%

Discount = -8.74%

Monthly Distribution: 0.055

Annual Distribution Rate (market price) = 7.18%

Effective Duration: 4.65 Years

Fixed-Income Sector Allocation

US Govt/agency

7%

Corporate Bond

65%

Loan participations

26%

Cash equivalents

2%

Country Breakdown (as of June 30, 2014)

United States

62%

Canada

7%

Luxembourg

4%

Cayman Islands

3%

Netherlands

3%

Brazil

2%

Ireland

2%

Other

17%

Credit Quality (as of June 30, 2014)

BBB

20%

BB

40%

B

32%

CCC

5%

NR

3%

Investment Performance: NAV Return as of 08/18/2014)

YTD+5.55%

1-Year+10.34%

3-Year+11.05% annualized

5-Year +13.26% annualized

10-Year +10.23% annualized

KMM is currently trading at a discount to NAV of -8.74% compared to the 52-week average discount of -5.05%. Here are some Z-statistics for the discount to NAV:

  • 2-year Z-statistic = -1.30 (2-year avg= +0.43%)
  • 1-year Z-Statistic = -0.76 (1 year avg= -4.89%)
  • 6-month Z-Statistic = -1.14 (6 month avg= -7.70%)
  • 3-month Z-statistic = -0.52 (3 month avg= -8.36%)

Source: cefanalyzer

Using these Z-statistics, the current discount to NAV is more than one standard deviation below the mean over the last two years, and well below the mean for the last three, six and twelve months.

KMM usually trades about 50,000 shares a day, so you need to be careful in handling large orders.

For longer term investors, KMM offers a dividend reinvestment plan that would be would be useful if KMM ever trades at a premium again. When the premium is 5% or higher, the plan buys shares at a 5% discount to the market price. Of course, with the current 8% discount, the plan would simply re-invest dividends at the market price, so you are better off taking cash dividends if you use a discount broker.

Overall, I think KMM currently provides a good entry point to buy a well managed multi-asset fixed income fund at an attractive discount.

Source: Deutsche Multi-Market Income: Wide Discount Provides A Good Entry Point