Sean Pavone
The MFS Intermediate Income Trust (NYSE:MIN) is a closed-end fund (“CEF”) that aims to provide high current income through investment grade securities. Unfortunately, with the fund earning only 1.9% p.a. over 10 years, the fund’s 8.5% of NAV distribution is simply a mirage created by paying back investors’ own principal. I would avoid this fund.
Fund Overview
The MFS Intermediate Income Trust is a closed-end fund (“CEF”) that seeks high current income through investments in investment grade (“IG”) corporate bonds and treasuries. The fund has approximately $350 million in assets and charges a 0.65% expense ratio.
Strategy
The MIN fund primarily invests in investment grade quality fixed income securities, including corporate bonds, securitized securities like commercial mortgage-backed securities (“CMBS”), U.S. government securities (“treasuries”), municipal securities, and foreign government securities . The manager goal is to keep the portfolio’s duration between 3 to 10 years.
The MIN fund aims to make monthly distributions equal to an annualized 8.5% of NAV.
Portfolio Holdings
Figure 1 details the MIN fund’s asset allocation and credit quality allocation as of November 30, 2022. 52.6% of the fund is invested in IG corporate bonds, 38.0% is invested in U.S. treasuries, and 5.4% is invested in municipal bonds.
Figure 1 – MIN fund asset allocation (mfs.com)
The fund has an effective duration of 3.8 years and the fund’s top 10 holdings are all treasury securities (Figure 2).
Figure 2 – MIN fund top 10 holdings and portfolio statistics (mfs.com)
Returns
As of November 30, 2022, the MIN fund has generated very modest returns over the long-run, with 3/5/10Yr average annual returns of -0.4%/1.5%/1.9%. In the short-term, the MIN fund lost 7.9% YTD to November 30, 2022.
Figure 3 – MIN fund historical returns (mfs.com)
Looking on an annual basis, the fund’s best annual return in the past decade was 8.1% in 2020. The worst return was in 2022, where it lost -8.3%.
Figure 4 – MIN fund annual returns (morningstar.com)
Distributions & Yield
As noted above, the MIN fund pays a monthly distribution equal to an annual 8.5% of NAV. This translates to $0.28 in the trailing 12 months or a 10% trailing yield (Figure 5).
Figure 5 – MIN fund trailing distribution yield (Seeking Alpha)
Investors should note that there is a large earnings gap between the MIN fund’s 10-Yr average annual returns of 1.9% and its stated distribution rate of 8.5% of NAV.
What this means in plain English is that while the fund ‘appears’ to be paying a very high distribution rate, the distribution is not ‘earned’. Instead, investors are simply paid back their own principal. Over time, this leads to amortization of the NAV and a declining distribution.
For example, the MIN fund’s NAV has declined from $9.27 on March 31, 1988 to $3.01 on November 30, 2022 for a compounded CAGR decline of 3.2% (Figure 6).
Figure 6 – MIN’s NAV has declined at 3.2% CAGR since 1988 (morningstar.com)
The annual distribution has likewise declined, from a high of $0.66 in 1993 to $0.28 in 2022 for a 3.0% CAGR decline.
Figure 7 – MIN’s annual distribution has likewise declined (Seeking Alpha)
Conclusion
The MIN fund aims to provide a high current distribution rate of 8.5% of NAV from its investments in investment grade securities. Unfortunately, looking at the fund’s long-term performance, the fund is clearly funding its distribution from return of investors’ own principal. Over time, both the NAV and distribution rate has shrunk. I would recommend investors look elsewhere for high yielding fixed income funds.
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