Allspring ERC: Global Fixed Income CEF Plodding Along

Thesis

The Allspring Multi-Sector Income Fund (NYSE:ERC) is a global bond closed end fund. The fund has current income as its main objective and has a managed distribution policy for its dividend. The fund has just lowered its dividend on the back of a lower 12-month trailing NAV. The current yield is now 8.4% (what you see on the main Seeking Alpha page is incorrect – just look under the dividends section at the last distribution which was 0.0708, multiply that by 12 and divide by the fund’s price). You can read here and here about our previous coverage.

The CEF is a global bond vehicle, and has a three-pronged focus:

• High Yield Debt (can be from 30% – 70%). Current allocation is 64%
• Foreign Securities (can be from 10% – 40%). Current allocation is 14%
• Other U.S. IG Debt (can be from 10% – 30%, includes MBS, Investment Grade Corporate Bonds). Current allocation is 19%

The fund has managed to post the same total return as the much better known DoubleLine Income Solutions Fund (DSL) in the past year. ERC is down only -14% during the period from a total return perspective. The fund is now back to trading at a small premium to NAV, but has seen that figure tightly correlated to risk-on/risk-off markets in the past year. The fund takes sovereign bond exposure in local currencies, but does not always hedge. Expect a positive from this currency exposure as the DXY starts decreasing after its massive rally in the past year.

Analytics

AUM: $0.284 billion.

Sharpe Ratio: 0.05 (5Y).

Std. Deviation: 11.8 (5Y).

Yield: 8.4%.

Expense Ratio: 1.19%.

Premium/Discount to NAV: 1%.

Z-Stat: 1.22.

Leverage Ratio: 30%.

Risk Factor: U.S. High Yield / International Sovereign

Performance

ERC has kept up with the much better known global bond fund DoubleLine Income Solutions:

We have compared ERC here with DSL and another global bond fund, namely Western Asset Global High Income Fund (EHI). The cohort’s performance is very tight, with all names down around -15% in the past year from a total return perspective.

Longer term ERC actually outperforms its peers:

It is interesting to note that the CEF outperforms the cohort by a significant amount when looking back on a 5-year period.

Premium / Discount to NAV

The fund’s premium/discount to NAV has had a high beta this year to market wide risk-on / risk-off moves:

We can see the fund’s discount widening to -10% during the September/October sell-off, only to bounce back up into positive territory now. This level is not sustainable in today’s macro environment (an extremely volatile one) and we expect the premium to once again move to a discount during the next risk-off move.

Holdings

The fund focuses on high yield bonds and sovereign debt:

From a geographic standpoint, the CEF is truly a global aggregator:

The high yield portfolio is very granular, with the top holdings from a concentration standpoint being constituted by the sovereign debt the fund holds:

From a credit rating perspective the fund is not overly risky, with a very small CCC bucket:

We can see from the above table that the vehicle has an even distribution across the BBB / BB / B buckets, signaling a very balanced approach to its credit profile.

The fund takes currency risk, which is not explicitly outlined in its factsheet, with most of the sovereign bonds it holds denominated in local currency. The CEF’s mandate allows it to hedge its currency exposure if it chooses to do so, but based on the latest annual report we could not identify any derivatives meant to manage that exposure. With the dollar index up significantly in the past year, we expect the fund to reap the benefits of a weaker dollar in the years to come.

Distributions

The fund has a managed distribution plan as outlined in its 2022 Update Release:

Effective with the distribution to be declared in August 2022, the plan will provide for the declaration of monthly distributions to common shareholders of the fund at an annual minimum fixed rate of 8% based on the fund’s average monthly net asset value (NAV) per share over the prior 12 months. Under the managed distribution plan, monthly distributions may be sourced from income, paid-in capital, and/or capital gains, if any. Shareholders may elect to reinvest distributions received pursuant to the managed distribution plan in the fund under the existing dividend reinvestment plan, which is described in the fund’s shareholder reports.

To note that the CEF has recently cut its distribution by 4%, in accordance with its 12 months trailing NAV methodology:

Wells Fargo Multi-Sector Income Fund (NYSE:ERC) declared $0.0742/share monthly dividend, -4.1% decrease from prior dividend of $0.0774. Payable Dec. 1, 2022 for shareholders of record Nov. 14, 2022.

The current distribution yield is much closer to what the portfolio actually generates as a cash flow stream versus the prior figures. We can see this fund having a history of NAV decreases on the back of artificial yield subsidies when asset dividends are low in the market. The fund does not post in the public space any Section 19.a reports for us to give you the latest actual split for income versus ROC.

Conclusion

ERC is a global bond closed end fund. The vehicle has held up well in the past year despite the rates and credit spreads headwinds. The fund has posted nearly the same total return as the much better known DoubleLine Income Solutions Fund when looking back on a 1-year basis (an approximate -15% total return). Its largest exposures are U.S. high yield and sovereign bonds. The CEF holds sovereign bonds in their local currencies, and usually runs the FX exposure, although it has the mandate to hedge if it chooses to do so. From a credit rating perspective, the fund is fairly well balanced, with an even distribution across the BBB / BB / B buckets. As rates and the dollar both peak, this fund is correctly set-up to take advantage of the macro set-up for the upcoming years. Nothing is linear though, and we expect another leg down in the risk assets, which should result in the fund’s premium to NAV to revert to a discount, and the fund NAV to decrease during the risk-off bout.