Please Note: this blog post originally appeared on Seeking Alpha and is specifically meant for followers of my Personal Perpetuity Portfolio as outlined in my ebook .
Whenever my CEF positions get far enough off their target sizes, I like to take a closer look to see if it's time to rebalance with another fund. Stone Harbor Emerging Markets Income Fund (EDF) is one such fund. The recent run-up in price pushed it beyond its target size for my portfolio, so it's time to take a closer look. While I don't like switching shares from a higher-yielding fund to a lower-yielding one, in this case, I believe it would be a prudent move.
For one thing, EDF is trading at a premium, although a tolerable one. Most of my other funds are trading at discounts. I usually don't worry too much about premiums of 10% or less, but what concerns me is that if the current distribution rate at market is over 13%, then obviously the DR at NAV is well over the red-flag threshold of 12%.
Taking a quick look at CEFconnect, the 12-month return on NAV as of yesterday (2/14/18) is 12.45%. This is under the NAV yield of 14.98%. Not a huge difference there, and the recent pullback is a factor in the return figure. In and of itself, this 2.5% under-earning would not concern me.
However, comparing the earnings per share (as of 11/30/17) of .1190 to the distribution per share of .1800 is cause for concern. Moreover, the earnings don't even cover the portion of the distribution strictly from income.
All these factors together may add up to trouble. I believe that caution is warranted. Admittedly, I have not recently studied the fund in-depth, but a cursory glance says to trim the position and watch it closely.
If it does end up cutting its distribution, the market price will pull back on the selloff, and that would be a better time to load back up on some more shares.
In the meantime, caveat emptor.