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EDI: High Yield, Higher Risk


  • EDI invests in sovereign and corporate debt in emerging markets. At current market prices it offers a tempting double digit yield.
  • However,  the IMF has warned about fragility due to the rapid increase in emerging markets debt.
  • The risks of emerging market debt are amplified by the fund's use of leverage.
  • EDI has traded at a double digit premium since 2018, but this is unsustainable.

Stone Harbor Emerging Markets Total Income Fund (NYSE:EDI) offers a tempting 16.9% yield at the current market price. Although emerging markets represent a long term growth opportunity, low interest rates have driven excessive borrowing in recent years. Since EDI uses a significant amount of leverage, and trades at a hefty NAV premium, even a minor disruption to emerging markets could be painful for EDI investors.


EDI invests in both sovereign debt and corporate debt in emerging markets. Approximately 50% of EDI’s portfolio is in sovereign debt owed to external creditors, and approximately 34% is in sovereign debt denominated in the local currency. The rest of the portfolio is in emerging market corporate debt, with a small amount of equity. EDI’s largest currency exposures are in Indonesian Rupiah (4.85%) Russian Rouble(5.3%), and Brazilian Real (4.5%). The average yield on EDI’s portfolio is 7.73%.

The following chart shows EDI’s portfolio by sector.

Source Fact Sheet

Regionally, EDI’s largest exposure is in Latin America (~42%), and Africa (~33%). The following chart shows EDI’s portfolio by region:

Source Fact Sheet

EDI is taking significant duration risk. The effective duration on the whole portfolio is 7 years. Approximately Just over 40% of the portfolio has maturity greater than 10 years. Another 38% has maturity of between 5 and 10 years. The following chart shows the maturity profile of EDI’s portfolio.

Source: CEF Connect

The ability of emerging market countries to issue such long maturity bonds reflects how favorable the market is for issuers. Yet, this is also a key risk for EDI investors.

Emerging Market Debt Risk

Easy money in the US has driven a friendly borrowing environment for emerging markets. With developed market debt yielding less than zero for much of the year, investors seeking income have had to take more risk than they are

This article was written by

Much more than closed end funds, look for hidden value, especially in investment companies and macroeconomic or industry dislocations.Areas of focus include: -NAV discounts-Liquidations-Fund restructurings-Income strategies-Shareholder activism-Macro opportunitiesI previously submitted individual stock research on Seeking alpha under the (no longer active) Afanti Arbitrage account.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (6)

What can you replace it with that gives one the same monthly income?
Not much.
surfgeezer profile picture
Just part of diversification for me. Long term hold.
EDF trades at a significantly higher premium than EDI. My money is with EDI over EDF.
adam22164 profile picture
@CRAIGK007 One thing to keep in mind when comparing EDF and EDI is that EDI uses a lot of leverage, whereas EDF has almost no leverage. I think the use of leverage that could magnify a downturn is part of the authors thesis. Even with the higher premium, I think EDF is the better fund to hold for the lack of leverage. Both funds always trade at a premium, perhaps this is one reason the premium for EDF is higher with essentially the same holdings in each.
Maybe, but both EDI and EDF are now trading neck and neck and EDF has almost always traded higher than EDI (as of 3/12 EDI is currently trading higher), so EDF has fallen harder with the market correction. Both funds are risky IMO.
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