MPV And MCI: Great Funds, But Even Better With 'Dividend Holiday Trade'

The article discusses a strategy called the 'Dividend Holiday Trade' involving Barings Corporate Investors (MCI) and Barings Participation Investors (MPV), two closed-end funds specializing in private credit. Due to the funds' unusual dividend payment schedule, investors can capture the full annual dividend yield of around 8% by holding the funds for approximately seven months, from late May to late December. The strategy suggests using the remaining five months to invest in other dividend-paying assets like Barings Global Short Duration High Yield (BGH), Janus Henderson AAA CLO ETF (JAAA), Eagle Point Income (EIC) or XAI Octagon Floating Rate (XFLT) to potentially increase the overall annual yield, although this involves risks related to market fluctuations in the replacement fund.

Analysis

Barings Corporate Investors (MCI) and Barings Participation Investors (MPV) are closed-end funds specializing in private credit, specifically "privately placed, below-investment grade, long-term debt" often accompanied by equity features, and have established themselves as premier performers within the high-yield bond closed-end fund sector. Both funds demonstrate robust long-term total returns, achieving average annual returns exceeding 10% over the past three decades, which has matched or surpassed the S&P 500 (SPY). Currently, MCI offers an 8.0% annual yield, derived from a $1.60 annual dividend on a $19.94 price, while MPV provides an 8.6% yield, based on a $1.48 annual dividend at a $17.26 price. The article introduces a tactical approach termed the "Dividend Holiday Trade," which leverages the funds' atypical distribution chronology: all four "quarterly" dividends are paid to shareholders who maintain their holdings for approximately seven months, typically from just before the first quarter ex-dividend date (e.g., May 30th) to immediately after the fourth quarter ex-dividend date (usually late December). This distinct payment cycle presents an opportunity for investors to reallocate capital during the five-month interim (early January to late May) into alternative income-generating assets. For example, employing MPV's 8.6% yield and investing in a fund such as Barings Global Short Duration High Yield (BGH), which yields 10.1%, during MPV's non-distribution period could theoretically elevate an investor's annual portfolio yield to a combined 12.8%. Nevertheless, this strategy is not without risks, predominantly the market risk associated with the interim investment, which could underperform or depreciate, thereby diminishing the capital available for repurchasing the original MPV or MCI shares, or the risk of MPV/MCI appreciating significantly while not held. The article suggests MPV as potentially more suitable for this strategy due to its higher current yield and lower premium.

Key Decisions for Investors

• Investors seeking to enhance income from their fixed-income portfolios could evaluate the 'Dividend Holiday Trade' with MCI or MPV, leveraging their respective 8.0% and 8.6% yields and unique dividend calendar to potentially achieve superior overall returns via strategic short-term capital reallocation.
• A rigorous assessment of any interim investments, such as BGH, JAAA, EIC, or XFLT, is imperative, carefully weighing their yield offerings against the potential for capital depreciation or underperformance relative to a continuous holding of MCI/MPV, which could undermine the strategy's intended advantages.
• Accurate timing of buy and sell orders around the critical ex-dividend dates—specifically late May for the initial quarterly dividend and late December for the final quarterly dividend—is crucial for successfully capturing all distributions within the delineated seven-month holding window.
• This active management strategy is more appropriate for investors possessing a higher risk tolerance and a preparedness for tactical trading, as it introduces complexities and risks beyond a straightforward buy-and-hold approach to these historically strong-performing private credit funds.