MMT - MMT: Multi-Asset CEF With An Active Trading Strategy

2023-04-26 06:50:24 ET

Summary

• MFS Multimarket Income Trust is a multi-asset fixed income CEF.
• The vehicle is currently overweight U.S. HY at 63%, followed by EM Debt at 28% and U.S. Corporate IG at 28%.
• The CEF takes an active portfolio management approach, being very short US, European and Australian Treasury futures presently.
• The fund is in the midst of a number of changes in terms of its portfolio management team.
• The portfolio has a 4.9 years duration and a discount to net asset value of -7.4%.

Thesis

MFS Multimarket Income Trust ( MMT ) is a multi-asset fixed income CEF. The vehicle has been in the market for a long time, having IPO-ed in 1987. Longevity does not guarantee performance in the fixed income markets though, and MMT is an example of that.

The CEF over-distributes, and tends to have a very active approach to its portfolio rather than a classic buy-and-hold strategy. This method of portfolio management has results in an eroding NAV in the past decade and a fairly mediocre true total return performance:

As a reminder for new CEF investors, this asset class is structurally allowed to distribute principal as interest, thus a retail investor needs to look at 'Total Return' metrics in order to ascertain a true fund performance.

The vehicle is a multi-asset CEF, currently being overweight U.S. HY at 63%, followed by EM Debt at 28% and U.S. Corporate IG at 28%. The vehicle takes a very active approach as well in terms of duration management and yield curve speculation, the fund currently being very short US, European and Australian Treasury futures.

An active management like this one, more akin to a hedge fund, relies heavily on the acumen of the portfolio managers involved. To this end MMT is currently undergoing some substantial changes :

• Effective April 30, 2024, Matt Ryan will no longer manage the portfolio.
• Effective March 31, 2023 Neeraj Arora will join the portfolio management team.
• Effective January 20, 2023 Henry Peabody will no longer manage the portfolio and Jay Mitchell will join the portfolio management team.

Looking at its historic performance the fund tends to do well only during lower rates and lower credit spreads environments. That should mean a good 2024 for this name.

The right way to look at this CEF is from a NAV accretion perspective rather than for income given its distribution yield is not supported. The vehicle is running a moderate amount of leverage at 25%, so a fairly conservatively set-up. The fund will have a good 2024 given expected lower rates and credit spreads, but given current management changes there are better multi-asset fixed income CEFs out there to play the recovery (one of them being BIT which we cover ).

Analytics

• AUM: $0.27 bil.
• Sharpe Ratio: 0.4 (3Y).
• Std. Deviation: 10 (3Y).
• Yield: 8.5%
• Premium/Discount to NAV: -7.4%
• Z-Stat: 0.29
• Leverage Ratio: 25%
• Composition: Fixed Income Multi-Asset
• Duration: 4.9 years

Holdings

The fund holds a mix of fixed income assets:

The vehicle is overweight U.S. HY at 63%, followed by EM Debt at 28% and U.S. Corporate IG at 28%. Please note the fund holds some local currency paper as well, with the USD portion of the collateral at 96.6%.

The negative figures you are seeing above in U.S. Treasuries and Other Sovereigns are from short positions via futures:

The CEF is short both treasury futures as well as the European equivalent via German bond futures (Bund, Schatz and BOBL in the above table). Furthermore the fund is short Australian treasury futures as well.

The fund is doing the above for two reasons:

• Speculate on curve moves
• Reduce some portfolio duration

The massive current position is mostly speculative in our view, with the market currently seeing a significant amount of participants short treasuries:

Distributions

Given its structure and holdings, the fund does not cover its distribution:

MFS Multimarket Income Trust Distribution period: April 2023 Distribution amount per share: $ 0.03289

The following table sets forth the estimated amounts of the current distribution and the cumulative distributions paid this fiscal year to date from the following sources: net investment income, net realized short-term capital gains, net realized long-term capital gains and return of capital or other capital source. The fund's fiscal year begins each November 1st. All amounts are expressed per common share :

We can see that cumulative, for the fiscal year to date, the fund has utilized 73% of return of capital in its distribution. That speaks ill to its NAV:

Performing CEFs that do not over-distribute tend to have a fairly stable NAV, with maybe -15% decreases during recessions. Here we observe a steadily decreasing NAV due to the substantial utilization of ROC and the inability of the fund managers to generate capital gains through their trading to offset that.

Premium/Discount to NAV

The fund usually trades at a discount to net asset value:

We only saw this CEF trade at or above flat to NAV during the zero rates environment that followed the Covid crisis. Only expect a narrowing of the discount once the Fed starts lowering rates.

Conclusion

MMT is a multi-asset fixed income CEF. The fund has been in the market for a long time, but longevity does not guarantee performance. The CEF is overweight U.S. HY at 63%, followed by EM Debt at 28% and U.S. Corporate IG at 28%. The CEF takes an active portfolio management approach, being very short US, European and Australian Treasury futures presently. This fund is not your usual buy-and-hold vehicle, engaging in speculative trades regarding moves in the yield curve. Its portfolio management team is also going through some changes, so we shall see the impact on performance. The CEF's yield is unsupported, with the latest interest distribution containing over 70% ROC. We feel this fund will have a decent 2024, but there are much better multi-asset CEFs and ETFs out there, one of them being BIT which we cover.

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