EHI: Sustainable High-Yielding Globally Diversified Fixed Income Portfolio (NYSE:EHI)

~ by Snehasish Chaudhuri, MBA (Finance)

Western Asset Global High Income Fund Inc (NYSE:EHI) is a closed ended fixed income mutual fund (CEF’) that invests in the fixed income markets across the globe. However, almost 68 percent is invested in the US and Western European countries. 97 percent investments are made in US dollars, which have become very strong since Russia’s invasion of Ukraine. It targets undervalued bonds of companies operating across diversified sectors. EHI seeks to buy bonds at discount in order to gain the price differential during maturity. Weighted average price of the portfolio of bonds is $86.86. EHI uses leverage in its portfolio, and generates strong double-digit returns over the long term. This return is aided by consistent strong yield. And the best part of EHI is that despite strong returns, the fund is available at a reasonably high discount.

Birds-Eye-View of Portfolio of Western Asset Global High Income Fund Inc

As seen on Seeking Alpha, Western Asset Management Company Limited was “launched and managed by Legg Mason Partners Fund Advisor, LLC. The fund is co-managed by Western Asset Management Company, Western Asset Management Company Limited, and Western Asset Management Company Pte. Ltd.” The primary objective of this fund is to generate high current income in the form of dividend. It has been able to successfully achieve its objective with a year-to-date (YTD) average yield of 10.54 percent. It pays a monthly dividend and recorded a 10-year annual average yield of 9.5 percent. Due to such high yield, EHI also generated strong total return. Annual average total return between 2016 and 2021 stood at 13 percent. It’s also available at a discount of 9.6 percent.

On the flip side, Western Asset Global High Income Fund Inc lost 30.7 percent of its market value during this year. But at the same time, the broader market too, performed poorly during this period. Macroeconomic factors such as Russia’s invasion of Ukraine, supply side shortages, rising level of unemployment, record high inflation, and multiple hikes in interest rates have led to a bearish market overall. However, as discussed earlier, annual average total return during the period between 2016 to 2020 was quite high. This was a period when global economies were more stable, and the impact of covid-19 pandemic was present only in 6 out of 24 quarters. Overall pessimism in the current macroeconomic situation will obviously impact the returns of EHI in the coming months. However, over a longer period of time, a sustained double-digit return is not impossible, primarily due to its consistently high yields.

Risks Involved in Investing in Western Asset Global High Income Fund Inc

Regarding the benchmark of Western Asset Global High Income Fund Inc, Seeking Alpha’s EHI page says “the fund benchmarks the performance of its portfolio against the Barclays Capital U.S. Aggregate Index, the Barclays Capital U.S. Corporate High Yield 2% Issuer Cap Index, and the JPMorgan Emerging Markets Bond Index Global.” It targets fixed income securities rated BBB or below, and emerging market government securities. 90 percent of EHI’s investments are rated BBB or below. The average credit quality (S&P) of its portfolio is BB+ and effective duration is 6.66 years. Effective maturity of this portfolio is almost 10 years. Expense ratio, though is quite high at 1.9 percent, it should not bother investors due to consistent high yields.

When it comes to sectoral allocation, two-thirds of its assets are invested in four groups of securities – government securities, consumer cyclical industries, financial and energy companies. In general, these types of bonds have a reputation of honoring their dividend and principal repayments. Thus, despite EHI’s portfolio having a high proportion of non-investment grade securities, I am of the opinion that it has a comparatively low level of risk. Top 15 investments consist of almost one-third of its entire portfolio, and the best part is 12 out of these 15 securities have a coupon between 6 to 8 percent. However, all these securities will mature within the next 15 quarters. Hopefully, these bonds will get replaced by equally high-coupon bonds.

Seven-Factor Model for Evaluating Global Fixed Income Securities Funds

My seven most critical criteria for evaluating global bond funds are – stock price performance, sufficiently large AUM, strong annual average yield, degree of portfolio diversification, average credit rating, current discount to NAV, and sustainability of future yield. I generally pick up funds with prices higher than $5, AUM of more than $200 million, and annual average yield of at least 5 percent. Western Asset Global High Income Fund Inc qualifies through the minimum requirements. With regard to risk profile, I’d rate this fund as a bit risky, but within a manageable limit. Although 90 percent of its assets are invested in bonds rated BBB or below, due to its investments in economies with strong sovereign credit rating, the risk reduces to a certain extent. Moreover, two-thirds of its assets are invested in sectors that have a reputation of honoring their dividend and principal repayments.

EHI’s portfolio is reasonably well diversified, and at the same time, I believe that investments are made in the right markets and right sectors. It pays a monthly dividend and recorded a strong yield over the years. Due to such high yield, EHI also generated strong total return. The fund at present is available at almost 10 percent discount to its NAV, which makes the fund attractive. In my opinion, there is no substantial reason for which the fund will not be able to generate a strong yield. Even if the fund misses out by some extent, still the yield will be strong enough to generate substantial return for its shareholders. Western Asset Global High Income Fund Inc thus can be considered as a good option for income-seeking investors, due to the level of portfolio diversification, strong and sustainable yield, and trading at a good discount.

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