MFV - MFV: Multi-Asset CEF With A Forgettable Portfolio

2023-07-05 15:58:24 ET

Summary

• The MFS Special Value Trust is a multi-asset closed end fund with roughly equal allocations in fixed income and equity. The fund is considered a risk-on vehicle due to its high yield bond investments.
• The fund's performance has lagged behind its peers in the multi-asset space, particularly due to its overweight allocation to mega-cap financials. Over a 10-year period, the fund posted a 5% annual total return.
• Despite a managed distribution plan of 10%, the fund has not been able to achieve that return annually, resulting in a decreasing NAV.

Thesis

MFS Special Value Trust ( MFV ) is a closed end fund from the MFS fund family. The fund falls in the multi-asset category, with roughly 50/50 fixed income and equity allocations:

MFS (Massachusetts Financial Services Company, the fund's investment adviser) normally invests the majority of the fund's assets in debt instruments, including below investment grade quality debt instruments. In addition, MFS normally invests a portion of the fund's assets in equity securities. MFS may invest the fund's assets in foreign securities. The fund seeks to make a monthly distribution at an annual fixed rate of 10% of the fund's average monthly net asset value.

Source: Annual Report

The CEF is a risk-on vehicle, with the fixed income portion composed of high yield bonds rather than investment grade credits or treasuries. In this article, we are going to have a look at the fund's composition, its portfolio, and its returns as benchmarked against other multi-asset CEFs.

Holdings

Firstly, let us have a look at the general fund portfolio allocation:

As we can see from the above table, around 45% of the fund holdings are allocated to high yield corporates, around 7% to emerging markets debt, and roughly 42% to U.S. Equities with the rest being in cash. This is the typical allocation for multi-asset funds, although some of them do go overboard and barbell in MBS bonds and Treasuries with higher allocations.

The fixed income allocation is overweight high yield, which makes this fund a risk-on vehicle. Some multi-asset CEFs try to introduce a 'hedge' in their portfolios via MBS and Treasuries, with the general idea being that in normalized economic and yield environments Treasuries/MBS will rally when equities and high yield sell-off.

As seen in the above table, the fund's high yield portfolio is evenly split between 'BB' and 'B' bonds, with a small bucket for 'CCC' credits.

On the equities side, the CEF has an overweight allocation to mega-cap financials:

The fund has severely lagged some of its peers in the multi-asset space on a 1-year look back:

We can see the CEF in negative total return territory, while its peers are posting total returns in the double digits. The fund suffered through its equity allocation overweight financials, with the total return turning negative in March 2023 on the back of the regional banks' crisis.

Longer term, the CEF exhibits positive but modest total returns:

On a 10-year look back the fund posted a 5% annual total return. This is not a bad number, but also nothing to write home about.

The fund's discount to NAV has a high beta to macro cycles:

We can see the CEF exhibiting an exorbitant premium to NAV during the zero rates/bull market environment witnessed in 2020/2021, a premium which has now switched to a discount. The fund's discount has steadily moved wider since 2022. Expect this trend to change only after a significant spike in high yields and after the onset of a new structural bull market.

Distribution

The fund has a managed distribution plan of 10%, meaning it aims to provide a predictable dividend yield, even when it is not supported. Let us take a look at its NAV throughout time to see how this feature has tallied up with its returns:

The CEF is not leveraged currently, and as we can see from the above table, it has not been able to get to that 10% annual return historically. On a 10-year basis, funds which end up distributing what they make will have a fairly stable NAV (give and take +/- 10%). Not here.

Conclusion

MFV is a multi-asset CEF. The vehicle does not have any leverage currently and exhibits a roughly 50/50 fixed income/equity portfolio. This CEF is a risk-on vehicle, with the fixed income allocation invested in high yield debt. On the equity side, the CEF is overweight large-cap financials, which have dragged down its performance on the back of the regional banks' crisis. We do not like its cyclical equity allocation and are loathe to be long financials here in the cycle. The CEF has a 10% managed distribution plan but has not achieved that sort of return annually, which has resulted in an ever-decreasing NAV (down -36% in the past decade). When compared to its peers ( BCAT ) and ( GUG ) the CEF lags significantly. The fund's discount to NAV is justified, and will not start to narrow until we enter a new cyclical bull market. New money interested in multi-asset CEFs would do well to look at BCAT or GUG, but only on a market risk-off move.

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