MSD: Not Sure About That Negative Alpha

Emerging market debt is one of the few sectors that are still trading at better valuations than at the start of 2020. One CEF which has come up on the service is the Morgan Stanley Emerging Market Debt Fund (MSD) due to its lack of leverage which makes it look a bit more like an open-end fund rather than a CEF.

The table below from our Strategic Allocation Tool available to subscribers shows how the fund compares to other options in the sector (ETFs, mutual funds and CEFs) with respect to historic risk and return.

What the table shows is that the fund has underperformed 4 out of the 5 ETFs in NAV terms over the past 5 years. What this tells me is that the fund’s fee (which is around 3-4x that of the ETFs) significantly exceeds any alpha it is able to generate. More specifically, the fund outperforms the ETFs by around 0.4% per annum but after fees it underperforms by about 0.4%. So the fund’s marginal fee over ETFs is 2x its alpha which is not a great place to be.

In terms of drawdows, the ETFs had drawdowns of around 25-33% last year with MSD at 38%.

So what all of this tells me is that MSD has a combination of high fee, negative alpha post-fees, pretty unimpressive historic returns over passive options and pretty high drawdowns. Might pass on this one.

Thanks for reading.

Check out the rest of our daily market commentary, as well as our Income Portfolios and interactive Investor Tools at Systematic Income.

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