MEGI's High-Yield Mirage: A Closer Look at the Risks Behind the Distribution

The NYLI CBRE Global Infrastructure Megatrends Term Fund (NYSE: MEGI) has once again drawn attention with its April 2025 Section 19(a) notice, revealing a stark reality beneath its eye-catching 12.59% annualized distribution rate. While the fund’s promise of high income may allure income-seeking investors, the details in its latest filing expose critical vulnerabilities—from reliance on return of capital to a troubling track record of underperformance.

The Distribution Dilemma: Return of Capital as a Crutch

MEGI’s April 2025 distribution of $0.1250 per share is entirely sourced from return of capital (ROC), a practice that erodes shareholders’ tax basis and hints at a lack of sustainable earnings. Over the past fiscal year (June 2024–March 2025), ROC accounted for 36% of total distributions, while net investment income contributed just 44%. The remaining 20% came from capital gains, albeit modest short- and long-term realizations.

This heavy reliance on ROC is unsustainable. The fund explicitly warns that distributions exceed its income and gains, signaling a potential "capital cannibalization" cycle. For investors, this means future gains—or even tax liabilities—could outweigh current income, especially if the fund’s NAV continues to decline.

Performance: A Rocky Road Since Inception

Despite its recent 6.54% NAV-based return from June 2024 to March 2025, MEGI’s long-term performance is grim. Since its October 2021 launch, the fund has delivered a -0.70% average annual total return (NAV-based), a stark contrast to its lofty distribution rate.

The disconnect between distribution promises and performance is stark. The fund’s market price ($11.91) trades at an 11% discount to its NAV ($13.36), reflecting investor skepticism about its ability to sustain payouts. Such discounts often precede sharp corrections, as seen in other closed-end funds struggling to meet distribution targets.

Structural Risks: Governance and Market Dynamics

While MEGI benefits from the backing of CBRE Investment Management ($146.2B AUM) and New York Life Investments ($739B AUM), its closed-end structure amplifies risks. Unlike ETFs, closed-end funds can trade at persistent discounts, locking in losses for shareholders who exit during weak liquidity.

The fund’s governance adds another layer of uncertainty. While its Board reviews distributions quarterly, there’s no guarantee of future payouts. The April 2025 notice itself underscores this: "Distribution sources and amounts are estimates subject to change."

Tax Implications: Hidden Costs Ahead

Investors face a complex tax landscape. Distributions classified as ROC reduce the cost basis of shares, potentially triggering taxable gains even if shares are sold at a loss. For example, if an investor buys MEGI at $11.91 and receives $0.1250 in ROC monthly, their adjusted basis drops by $1.50 annually, amplifying tax exposure if the fund’s NAV falls further.

Conclusion: Proceed with Caution

MEGI’s April 2025 notice paints a troubling picture of a fund caught between high distribution expectations and poor performance. Key risks include:

1. Unsustainable Yield: A full year of ROC-driven distributions (36% YTD) suggests the fund is eroding capital to meet payouts.
2. Negative Long-Term Returns: A -0.70% annualized NAV return since 2021 undermines claims of value creation.
3. Market Discount Risk: An 11% discount to NAV hints at a looming reckoning for investors.

For income-focused investors, MEGI’s 12.59% yield is a siren song—a "yield trap" masking structural flaws. Alternatives like dividend-paying infrastructure ETFs (e.g., INFRA) or high-quality corporate bonds may offer safer income streams.

In summary, MEGI’s latest notice underscores a critical truth: high distributions without commensurate performance are a recipe for disappointment. Investors should prioritize funds with robust NAV growth and transparent income sourcing—or risk watching their capital slip through the cracks.