In a previous article I provided some analysis of Bill Gross’s picks, historical (2009/2010) and current ones for 2011 provided in Barron’s Roundtable article. One of Gross’s picks for 2011 was Pimco Corporate Income Fund (PTY), a closed end fund that uses leverage to generate investment income and maintain high dividend yields for investors. Once Gross’s selection became public on Monday, PTY jumped, and now the premium to NAV is over 10% – a stiff entry price for investors to chase. So I thought I would take a look at the other PIMCO closed end funds also managed by Bill Gross and team, and see if there are some alternatives to PTY.
Pimco Closed End Funds – Alternatives to PTY
I decided to compare 5 of the PIMCO closed end funds that managed taxable corporate debt in slightly different flavors. The table below provided a good summary comparison. It came from CEFConnect.com
Summary Comparison of PIMCO Closed End Funds
There is a lot of good information contained in the table. I highlighted some specific rows for discussion.
1. Premium/Discount – PTY trades with a premium of over 10% to it’s net asset value. This means that the price to buy this closed end fund is greater than the value of the securities held by the fund by that amount. Paying more than an asset’s market value is usually not a great investment strategy. The only solace with PTY is that the premium has persisted for most of the past 3 years. It is interesting to see it compared to Pimco Floating Rate Strategy Fund (PFN), where there have been longer periods of discounts.
PTY 3 Year Chart of Premium/Discount to NAV
PFN 3 Year Chart of Premium/Discount to NAV
PTY has outperformed PFN thus attracting more investor interest and willingness to pay up, thus the persistent premium. There could be many reasons for outperformance, and one might be duration of the portfolio.
2. Average Duration – Duration is worth a look if you are concerned about rising interest rates. Higher duration means higher sensitivity to interest rates and more loss of principal if rates rise. With an upward sloping yield curve it also means that higher duration generates higher yields, other factors being equal. We can see that PTY has one of the highest durations and PFN the lowest. This might explain some of the yield differential. It also might mean PFN would have an edge in a rising interest rate world.
3. Distribution on NAV – This is the yield the actual investments are providing. Again PTY is top and PFN is the bottom. Again duration might be a key reason for PFN’s lower yield. The higher yield of PTN might be a combination of higher duration and higher credit risk for PTY vs PFN. The other three funds fall in between PTY and PFN.
4. Leverage – Closed end funds don’t need to be leveraged but many of the fixed income ones do use leverage to obtain additional investment funds. Leverage means that the fund issues preferred stock at a low interest rate with a AAA rating using its portfolio of securities as collateral. This allows the fund to juice the yield. The 22-36% leverage levels seem reasonable and not radically different from fund to fund, with the exception of PKO at 44%.
Performance of the 5 PIMCO Closed End Funds
Here is the past year performance of each fund, also compared against the LikeAssets benchmark. All five performed well enough to beat the appropriate benchmarks.
1 Year Return and Comparison to Benchmark
Picking an Alternative to PTY
Looking at the five funds, PIMCO Corporate Income (PCN) seems most comparable to PTY, Gross’s recommended investment for 2011. Yields, Duration, Leverage, all look to be in the same ballpark, and PCN has a much lower premium to NAV. It might be a worthy alternative if you agree with Gross’s investment outlook. I would avoid Pimco Income Opportunity Fund C (PKO) because of higher leverage and oddly high management fees – almost 1% higher than the other 4 funds. PIMCO Income Strategy Fund (PFL) and PFN might be alternatives with still generous yields, but expect lower yields than PTY if the duration is lower and the yield curve shape is maintained. PFL and PFN could perform better in a rising interest rate environment and also offer a lower premium to NAV for entry.