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The Federal Reserve has indicated it will keep interest rates at the current low levels until the end of 2014. Many investors, especially retirees, are looking for a way to put money to work earning higher interest than what is available from US Treasuries.

Recently the emerging market countries have been attracting investment flows. According to the Wall Street Journal, emerging market bond funds have attracted inflows of $3.8 billion as of February 10, while emerging market equities have attracted $17 billion.

An investor in an emerging market bond fund can earn fairly high interest rates and can also benefit from currency movements. Emerging market foreign currencies may have room to run on the upside, since they have only regained about half the losses experienced from the peak in July 2011. Emerging market economies are relatively exempt from the troubles in Greece, and may attractive some capital leaving Europe.

Within the closed-end fund universe, the Morgan Stanley Emerging Markets Domestic Debt Fund (EDD) offers a good way to invest in emerging market debt based in local currencies. EDD uses a value-oriented approach and seeks a high total return from income and price appreciation by investing in a range of sovereign, quasi-sovereign and corporate debt in emerging market countries. Investments are mostly denominated in emerging market and/or non-US currencies. The fund uses a modest amount of leverage to enhance returns.

The EDD management team believes that improving emerging market economic fundamentals have not yet been fully reflected in domestic debt valuations. As these economies mature, emerging market currencies and interest rates should converge toward the levels seen in the developed world.

This is the asset type breakdown as of December 31, 2011:

Asset Type Breakdown (as of 12/31/2011)

Sovereign Non-Brady

119.57%

Quasi-Sovereign

10.22%

Forwards

-0.07%

Cash

-29.71%

Since inception (April 24, 2007), EDD has had compounded total return performance of 7.73% a year based on NAV.

Annual NAV Performance (from 2008)

2008

-18.39%

2009

+30.09%

2010

+16.71%

2011

-3.50%

YTD

+13.18%

Top 10 Country Ownership (as of December 31, 2011)

Brazil

22.90%

Mexico

19.48%

Turkey

13.33%

South Africa

12.45%

Indonesia

10.78%

Hungary

7.93%

Poland

7.75%

Columbia

6.57%

Thailand

5.65%

Argentina

5.40%

EDD is currently selling at a discount to NAV of -9.30% compared to the 6 month average discount of -8.94%.

Here are some other stats on EDD:

Morgan Stanley Emerging Markets Domestic Debt Fund

  • Total Assets: 1,658 MM Total Common assets: 1,306 MM
  • Annual Distribution Rate= 7.27%
  • Portfolio YTM= 9.77%
  • Last Regular Quarterly Distribution= $0.30 (Annual= $1.20)
  • Fund Expense ratio: 1.56%
  • Average S&P Rating= BB+
  • Interest Rate Duration: 5.66
  • Effective Leverage: 21.2%
  • Average Daily Volume: 210,000
  • Average Dollar Volume: 3.38 million
  • Discount to NAV= -9.30%

Overall, I think EDD is a decent purchase at current levels, since it was recently trading at a discount below 7% just a few weeks ago. It is fairly liquid and trades with a narrow bid-asked spread.

Source: Morgan Stanley Emerging Markets Domestic Debt Fund Looks Attractive Here