MFS Releases Closed-End Fund Income Distribution Sources for Certain Funds

MFS Investment Management announced the distribution income sources for May 2025 for five of its closed-end funds: MFS Charter Income Trust (MCR), MFS Government Markets Income Trust (MGF), MFS Intermediate High-Income Fund (CIF), MFS Intermediate Income Trust (MIN) and MFS Multimarket Income Trust (MMT). The reports detail the distribution amounts per share and breakdown the sources as net investment income, net realized short-term capital gains, net realized long-term capital gains, and return of capital. Notably, for MCR and MMT, the current distribution is entirely from return of capital, while the other three funds have a mix of net investment income and return of capital; investors should note that MFS's managed distribution plan may involve distributing capital gains or return of capital if sufficient investment income is unavailable.

Analysis

MFS Investment Management has disclosed the May 2025 distribution sources for five of its closed-end funds, revealing a significant reliance on Return of Capital (RoC) for several. Specifically, MFS Charter Income Trust (MCR) and MFS Multimarket Income Trust (MMT) sourced 100% of their respective current distributions of $0.04390 and $0.03274 per share from RoC, with $0.00000 from Net Investment Income (NII) for this period. MFS Government Markets Income Trust (MGF), MFS Intermediate High-Income Fund (CIF), and MFS Intermediate Income Trust (MIN) also utilized RoC for their current distributions, at 48%, 53%, and 61% respectively. This reliance on RoC is also evident in cumulative fiscal year-to-date figures, where RoC constitutes 50% for MCR, 52% for MGF, 62% for MIN, and 54% for MMT, while CIF's cumulative RoC stood at 39%. Although these funds exhibit high annualized current distribution rates based on month-end NAV as of April 30, 2025 (e.g., MCR 7.93%, MGF 7.21%, CIF 9.41%, MIN 8.45%, MMT 7.94%), the composition of these payouts warrants scrutiny. Notably, MFS Government Markets Income Trust (MGF) reported a 5-year average annual total return (in relation to NAV) of -0.60% despite its 7.21% annualized distribution rate, underscoring that distributions are not consistently supported by underlying investment performance and are eroding NAV. All five funds operate under managed distribution plans, which permit distributions from capital gains or RoC if NII is insufficient. MFS explicitly cautions that such distributions do not reflect investment performance, and that RoC diminishes a fund's asset base, potentially increasing its expense ratio and compelling asset sales at inopportune moments. The per-ticker sentiment scores, which are mixed to negative for MCR (-0.4), MGF (-0.6), and MMT (-0.3), align with concerns about the sustainability of distributions heavily funded by RoC.

Key Decisions for Investors

• Investors should exercise caution with the high advertised distribution yields, as a substantial portion, particularly for MFS Charter Income Trust (MCR), MFS Government Markets Income Trust (MGF), MFS Intermediate Income Trust (MIN), and MFS Multimarket Income Trust (MMT), originates from Return of Capital rather than net investment income or realized gains, which can erode the net asset value over time.
• It is crucial to assess the long-term sustainability of these distributions by comparing Net Investment Income to total distributions and closely monitoring the cumulative total return on NAV (e.g., MGF's negative five-year average) rather than focusing solely on the stated distribution rate.
• Recognize that the managed distribution plans can be amended or terminated by the Board without prior notice, potentially impacting the funds' market prices and future payout levels, and consider that reliance on Return of Capital reduces total assets, which could lead to higher expense ratios or forced selling of portfolio securities under unfavorable market conditions.