Scalper1 News
The closed-end fund, DMO, is the best opportunity in mortgage debt. Two distribution increases and two special distributions this year bring the fund’s 2015 yield to 14%. DMO has beaten ETF, ETN and mREIT comps on 2015 returns. I have been writing recently about Western Asset Mortgage Defined Opportunity Fund (NYSE: DMO ) ( here and here ) and have made clear that, in my opinion, DMO is the best current opportunity in mortgage debt. I’ve compared it to the 2x ETN, UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA: MORL ), and the unleveraged ETF, iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ). DMO’s leverage (31%) falls between MORL’s 2x and REM’s unleveraged status. Some readers have considered those comparisons invalid because DMO is more like a mortgage REIT than those ETPs, which hold (or index to) a portfolio of mREITs. So, I’ve compared it to the largest mREITs, Annaly Capital Management Inc (NYSE: NLY ) and American Capital Agency (NASDAQ: AGNC ) as well. All four of these names have been very popular among income investors on Seeking Alpha and they continue to have their defenders relative to DMO. In my view the best comparison to DMO is PIMCO Dynamic Income Fund (NYSE: PDI ). Although PDI is not a pure-play mortgage debt fund, its portfolio is typically about two-thirds mortgage debt. Here are current charts for these tickers from Yahoo Finance. (click to enlarge) The chart includes prices for all and NAV for the closed-end fund, DMO and PDI. I am writing today to note that DMO announced its year-end distribution ($0.6498, ex-dividend 28 Dec), and that distribution will bring its 2015 distribution yield to something near 14%. This will be at least the fourth consecutive year that DMO has returned a 14% yield. For 2015, total distribution is down from the two previous years and yield is down from all three. The decreases relative to past years reflect the more modest special distributions this year. Note, however, that the regular distribution is up. There have been two regular distribution increases this year, which to me indicates a vote of confidence by DMO management that the fund will continue to generate strong income in coming years. Market price, NAV and the fund’s discount status have varied over the period, as we see in this chart. For the past two years, the fund’s price has remained in a channel between $24 and $25, so capital preservation has been strong, unlike many high-yield CEFs , which have seen marked declines over the period. A recent decline has taken DMO to the mid-$23 range. But as the first chart shows, that decline is much less than that experienced by any of the comps except PDI. The discount has been closing as investors seek safer refuges in the high-yield space, but it has still been dropping to near -4% on a regular cycle. Last week’s drop to -6.1% presented a buying opportunity. I’ll continue to look for discount drops and am planning to add to my position as they occur. Total return for the fund has been excellent as we see in this 5yr (click to enlarge) and this 1 yr chart from Ycharts . (click to enlarge) High yield income has been pummeled in recent weeks. DMO has held up to this reasonably well. Much of the bearish sentiment in debt and credit is extending from apprehensions over energy company debt. Clearly this does not apply to a mortgage debt fund. I’m hopeful that DMO, and other high yield investments that are not carrying energy debt, will bounce back in 2016. The long-promised gradual upward trend in interest rates is finally begun. This may adversely impact DMO and presents the most significant risk factor for the fund. If the increases are, in fact, gradual — and there is no reason to think they will not be — mortgage credit may be well positioned to handle the rising rates better than most high-yield categories. Scalper1 News
Scalper1 News