An interesting fixed income play
February 03, 2010
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RELATED TICKERS: MRF
I recently picked up a few shares of MRF @ around 7.51/share, a nice little investment (so far at least). MRF is a CEF which invests primarily in high yield securities from US companies and institutions with a bit of an interesting twist. The fund is structured to require that at least 65% of it's holdings remain in investment grade securities (BBB credit rating or higher) and the other 35% is almost entirely held in high yield junk bonds or structured debt with up to 33% leverage. It's an interesting mix of securities and leverage that nets a pretty nice yield without baking in too much risk.
There are a few things anyone looking to invest in this fund should consider though, one being that it does have significant CMO exposure(around 15% of the fund), however only a small fraction of that is based off of variable rate mortgages (5% total). There's also a fair amount of ABS/MBS exposure, the bulk of these are in GSE bonds but there's about 10% based in structured products from major banks. The good news about all this exotic stuff is that a lot of the losses have already been written down for the most part and the banks backing them have either been bought up or stabilized at this point. If you're expecting rough roads ahead for the banks and mortgages I'd be careful though, even though the downside losses are somewhat limited. It's also likely that interest rates will rise at least a bit this year despite the Fed's best efforts, which could put some pressure on the valuation of some of this fund's holdings. There's also the fact that this funds income correlates closely with it's payout rate, this might sound like a no brainer, but there are a number of CEFs out there that are poor investments primarily because they neglect that factor. Another thing to consider is that currently a lot of the discount rate has evaporated due to the latest drop in the stock market, however if the discount rate gets up around 5-6% again it's definitely worth considering.
Basically this is a fund worth looking at if you're looking for an attractive yield with the possibility of some extra gains due to improvement in the housing market throughout 2010. CEFs tend to offer a way to invest in some more exotic forms of debt and equity without requiring the same amount of capital as the bond market/mutual funds or running up a lot of broker fees but you have to screen them very carefully and know what you're getting into.
Fund info from it's sponsor's site here.
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