Closed-End Emerging Market Debt Funds (ESD and AWF)

David Neubert also picked up on the post about ESD by Where is the Yield?, and compared ESD to six other closed-end emerging market debt funds. I subjected Neubert’s list to a little more screening. My sources gave different information than Neubert’s for yield, expense ratio and discount. There were large discrepancies for the expense ratio, especially for ESD, but I’m not going to let that bother me if it really is the best choice. I have added beta and average trading volume for each security. The results are sorted in descending order of yield, and all data are as they were reflected on my sources’ websites on 10 Oct 2006. My source for beta and yield is http://marketrac.nyse.com/Light/ For discount, expense ratio, and average trading volume, I used http://www.etfconnect.com/

I don’t see a quick way to get this data in a proper table, but each ticker symbol is followed by its beta, yield, discount, expense ratio, and average trading volume.
MSD .20 7.14% 4.63% 1.36% 64000
AWF .40 7.06% 9.22% 1.23% 136200
ESD .32 6.77% 14.45% 1.00% 95200
TEI .26 6.61% 9.03% 1.20% 94200
AWG .39 6.58% 11.82% 1.46% 20200
EFL .10 5.92% 7.07% 3.05% 16200
EDF .20 1.02% 13.66% 1.82 73900

The following chart compares the performance of the three highest yielding funds on an historic basis. This picture makes the choice simple! AWF’s performance has been vastly superior over the long term.

To be entirely fair to ESD, which has only been trading since late 2003, here is a closer look at the last two years of data. Poor ESD has been quite a laggard, and deserves its high discount to net asset value. MSD has performed a little better than AWF over this shorter time frame, but for me at least, AWF looks like the clear winner.

According to etfconnect, The Alliance World Dollar Government Fund II (AWF) “is a closed end Fund which seeks high current income and capital appreciation. The fund invests primarily in high yielding and high risk sovereign debt and US corporate fixed income obligations that are expected to benefit from improving economic and credit fundamentals.” The fund traded at a premium of close to 15% in 98-99, then at a discount of more than 15% in 00-01, and it has been at a 14% discount in Oct. 05 and again in June 06. Rounding a few numbers here, the fund’s primary holdings, in descending order, are listed as “Other” 28%, US 15%, Russia 14%, Brazil 13%, Mexico 12%, Phillipines 6%, Argentina 6%, Venezuela 6%. The credit quality is 81% BBB and below. These investments are not for widows and orphans, but I see debt funds as a good way to balance equity investments in emerging markets, with a maximum portfolio weight of 4% for the whole sector.

AWF may be a better choice than ESD for this purpose. It trends nicely, and it is in a nice uptrend now, but I would prefer to buy at the end of a correction.

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One Response to “Closed-End Emerging Market Debt Funds (ESD and AWF)”

  1. David Neubert Says:

    Excellent post. Good job expanding the analysis. Still I wouldn’t want to make a big bet on emerging market debt right now.

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