2023-09-01 10:58:22 ET
Summary
- Western Asset Global High Income Fund has strong fundamentals, high yields, and total returns.
- The EHI closed-end fund has a sustainable yield and is less impacted by a market slowdown.
- EHI's portfolio provides exposure to the high-yielding corporate bond market and has good performance compared to similar funds.
~ by Snehasish Chaudhuri, MBA (Finance).
In my last coverage almost 36 weeks back, one of the reasons for which I found Western Asset Global High Income Fund (EHI) to post strong returns was the strengthening of U.S. dollars, due to Russia's invasion of Ukraine. Almost 68 percent of this fund was invested in the U.S. and Western European countries, and 97 percent of its investments were made in U.S. dollars. At that time, EHI was using substantial leverage, and was generating strong double-digit returns, which was again aided by a consistent strong yield. And the best part about EHI was that despite strong returns, the fund was available at a reasonably high discount . 36 weeks hence, things have changed for the better, but at the same time EHI is available at premium now.
EHI's Fixed Income Portfolio Has Strong Fundamentals, High Yields & Total Returns
Western Asset Management Company Limited was launched and is managed by Legg Mason Partners Fund Advisor, LLC. The fund is co-managed by Western Asset Management Company Pte. Ltd., Western Asset Management Company and Western Asset Management Company Limited. It benchmarks itself against the performance of Barclays Capital U.S. Aggregate Index, the Barclays Capital U.S. Corporate High Yield 2% Issuer Cap Index, and the JPMorgan Emerging Markets Bond Index Global. 90 percent of EHI's portfolio is rated BBB or below. The effective duration and effective maturity of this portfolio are 6.66 years and 10 years, respectively. Expense ratio, though quite high at 1.69 percent, should not bother investors due to consistent high yields.
The fund is a closed ended fixed income mutual fund, or CEF, that targets undervalued bonds of companies operating across diversified sectors and seeks to buy at discount in order to gain the price differential during maturity. The weighted average price of its bond portfolio is $89.37. The primary objective of EHI is to generate high current income in the form of dividend. It has been able to successfully achieve its objective with a trailing-twelve-months ((TTM)) average yield of 10.95 percent. The fund has paid monthly dividends for the past 200 months at a stretch. Due to such high yield, EHI also generated strong total returns. Total return over the past twelve months was 12.64 percent and annual average total return between 2016 and 2021 stood high at 13 percent.
EHI Has A Sustainable Yield, And The Fund Is Less Impacted By A Market Slowdown
Western Asset Management Company Limited is overweight on high-yielding low-rated bonds. However, there is also a significant presence of (almost 40 percent) highly rated government bonds. It is an actively managed fund with a high portfolio turnover. The fund has a high sectoral allocation to the energy sector, which makes almost one-fifth of the entire portfolio. Energy sector is followed by consumer cyclical and emerging market sovereign bonds. The fund undertakes rates and credit spread risk. It is currently covering almost all its distribution, although some of its income comes from other trading activity.
During my last coverage, I commented that "Overall pessimism in the current macroeconomic situation will obviously impact the returns of EHI in the coming months. However, over a longer period of time, a sustained double-digit return is not impossible, primarily due to its consistently high yields." However, investors of Western Asset Global High Income Fund Inc were fortunate not to lose out on returns over the past 36 weeks. The fund generated a YTD total return of almost 15 percent. As discussed in my last coverage too, EHI's current level of pay-outs are sustainable due to its strong weighted average coupon of almost 6 percent. The fund also has a very low beta of 0.5, implying the fund will be less impacted by a market slowdown.
Investment Thesis
EHI's portfolio provides exposure to the high-yielding corporate bond market and has good enough performance compared to similar funds. In fact, it is better than some corporate bond portfolios which are devoid from any treasury bond holdings. Effective duration and effective maturity of its portfolio suggests that the fund is fundamentally strong. EHI paid continuous monthly dividends and its distribution is mostly covered. The fund has been successful in generating high yield, which is in double-digit currently. Due to such high yield, EHI also generated strong average total returns. Expense ratio, though quite high, should not bother investors due to consistent high yields.
Western Asset Management Company Limited does a good job of sourcing good credits. It is an actively managed fund with a high portfolio turnover. However, it has a high leverage ratio and the presence of a high proportion of low-quality bonds may magnify any potential downfall. Again, low beta means the fund will not be that risky. If an investor is looking for global high yield exposure, EHI, in my opinion, stands to be a good option. But, at the current price point, I won't suggest a buy, as Western Asset Global High Income Fund is available at a premium now.
For further details see:
EHI: High-Yielding Bond Portfolio, Attractive Despite Premium Pricing