Morgan Stanley Emerging Markets Debt Fund
The fund is a non-diversified, closed-end management investment company. Its primary objective is to provide investors with high current income and as a secondary goal, to seek capital appreciation, through investments primarily in debt securities of government and government-related issuers located in emerging market. The market capitalization is $227M. The current yield is exactly 7.5% and the beta is 0.54, one of the lowest in the group. The Fund’s investment advisor and administrator is Morgan Stanley Investment Management Inc.
Ing Group, n.V. Perpetual Debt Securities
The debt is a subordinated perpetual debenture issued by ING Groep N.V., a Dutch bank, back in 2002. The overall size of the issue was $1B with a 7.20% coupon. The securities may be redeemed at any time during the next interest payment (this was the option kept by the bank after 2007). The price history is remarkably stable: the security traded near $25 per unit during 10 years out of 13 with the exception of 2008, 2009, and 2011. Currently, the market capitalization is at $555M and the beta is 1.64. Because the security trades above par, the annual dividend yield is slightly lower at 7%. The security’s trustee is The Bank of New York Mellon.
Overall, the total asset allocation within the portfolio (at equal weights given to every asset class – vanilla option) can be illustrated in the following diagram:
Analysis
After constructing a covariance matrix and using the wonderful Solver function, I created the following output consisting of various scenarios suitable to different investors:
Scenario 1: Simplest Composition
The easiest way to construct a portfolio is to give equal weights for all holdings. Although investors may think that this diversification method decreases risk, data shows that it really isn’t the most effective way to decrease portfolio variance. On the other hand, when comparing to Risk-Minimized scenarios this portfolio shows the highest expected return, especially given that the current dividend yield for this portfolio is 4%.
Scenario 2: Long/Short
This portfolio is deemed to have the smallest variance on the list (in fact, zero. I am not sure if that holds on day-to-day basis but in the long term the portfolio is expected to have on average zero volatility with respect to its own returns. Again, past results may not repeat in the future). Investors should also be cautious with the suggested exposure to gold and long-term Treasurys. However, the option of shorting may not be feasible to some investors
Scenario 3: Optimal Return/Risk
This 8-piece portfolio (0% to 25% Weights) gives the highest return among the Risk-Minimized group, while operating at a reasonable risk level (still below the expected return). Also notice that, compared to the Long Only Portfolio, it provides less exposure to gold and Treasurys and more towards US equities.
Scenario 4: Maximized Return/Modest Risk
The 5% to 15% Portfolio solution provides the highest return among the portfolios already mentioned, while maintaining a dividend yield very close to the Equal-Weights Portfolio (just below 4%). Also, for extra 42 basis points of risk this portfolio has obtained more that 1% extra expected return when compared to the Simplest Composition solution. Here, the biggest weights are allocated towards the highest gainers: Nasdaq-tracking trust and a Mexico fund. Overall, the portfolio holds all securities from the list.