This article was originally published a month ago. Since then EDF has announced a distribution cut, which has caused the discounts of the two funds two converge somewhat.
For followers of the CEF market, the riddle of the Stone Harbor EM debt CEFs is well-known. The funds share two related characteristics - they boast a high distribution rate and trade at lofty premia. However, middling historic returns, high fees, relative ease of access to EM debt and poor distribution coverage pose a continued challenge to market commentators struggling to explain why these funds have consistently traded at some of the highest premia in the market.
We have discussed these two CEFs before so we will spare our readers from another dead horse beating. Instead we would like to focus on two additional puzzles beyond the excessive premium issue. First, we try to understand why the two CEFs appear to have diverged in price in the past year. Secondly, we touch on the sudden shift in leverage composition of the funds that began with the sell-off of December 2018.
We don't have all the answers for these two additional riddles. Our main takeaways is that for investors committed to these funds it has historically made sense to shift between them based on relative pricing, especially now that their portfolios have essentially converged.
And secondly, leveraged funds that allocate to high-beta markets can find themselves at the mercy of volatility and forced to deleverage at inopportune times leading to permanent capital loss - something we think may have happened to the two funds.
A Quick Redux
The two CEFs we discuss in this article are :
- Stone Harbor Emerging Markets Total Income Fund (EDI)
- Stone Harbor Emerging Markets Income Fund (EDF)
One of the interesting aspects of the CEF market is
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