Published:
April 28, 2008
The Global High Income Fund (NYSE:
GHI, $14.88)
is one of the highest-yielding closed-end funds that doesn't
use leverage to lift returns. In other words, the fund does not
borrow or issue preferred shares to create extra money to
invest, giving it an important element of safety in volatile
markets.
This emerging-market income fund keeps at least 80% of its
assets in debt securities. The fund invests largely in the bonds
of foreign governments, which make up approximately 66% of its
portfolio. Its largest position, comprising nearly 6% of assets,
is in Argentinean bonds maturing in August 2012 -- and in total, nearly 14% of
the fund's assets are presently parked in Argentina. Other
government bonds in which the fund has important positions
include those issued by Turkey, Russia, Brazil, the Dominican
Republic, and Serbia.
The average credit quality of GHI's bond portfolio is just below investment grade ("BB"). Nearly a quarter of the
portfolio is in investment-grade bonds, including about 10% in
safe "AAA" and "A"-rated bonds. The bonds have an intermediate
average duration of less than six years, making them relatively
stable in the face of changing interest rates.
Emerging-market debt usually trades at a premium compared to the
debt of more established markets. That enables the fund to pass
on the higher yields to shareholders without resorting to
leverage or returns of capital.
In the past 12 months, the fund distributed $1.341 in regular
monthly payouts and another $0.7269 in year-end capital gains,
for a total annual payout of $2.07 per share. That gives GHI a
historical yield of a tempting 13.9%.
GHI's stated policy is to make monthly distributions of 9% of
the fund's net asset value on an annualized basis. In this regard, it is important to
note that NAV dropped slightly year-over-year, from $15.03 at
the end of January 2007 to $14.41 in the same month of 2008.
Correspondingly, the monthly per share payout dropped from the
mid-$0.11 range in early 2007 to about $0.108 currently.
The fund's regular monthly distributions have consisted entirely
of investment income or long-term capital gains. Unlike most
funds with a fixed distribution policy, GHI's payments are not
supplemented by a return of capital that simply pays you back
your original investment by digging into the fund's capital
base. In fiscal 2007, for example, 60% of the distribution was
comprised of investment income, and the balance came from capital
gains. Since most of the distribution is taxed as ordinary
income, the fund is best held in a tax-advantaged account.
GHI has traditionally provided investors with double-digit
yearly returns. For example, over the past decade it has
returned an average of +13.4% annually. These returns are
slightly dampened by a management fee of 1.32%.
Investors should note that many of the countries GHI invests in
are commodity exporters, so their fortunes are tied to commodity
prices. While this is an important risk factor, commodity prices
have so far held up well in the face of a U.S. economic
slowdown.
GHI is suitable for risk-tolerant investors who seek a high
current income not generated by leverage or supplemented by
returns of capital.Good investing!
Carla Pasternak
Editor
High-Yield
Investing
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