The purpose of this article is to discuss PIMCO Strategic Global Government Fund, RCS, and its attractiveness as an investment option. I recently wrote an article on this fund over a month ago and since then the fund has dropped close to 4%. With the drop in the market on Wednesday, RCS is currently at a key resistance level of $11.00/share. I want to examine the fund's recent performance and statements, current holdings and trends, and attempt to determine where the fund may be headed from here given its testing of this key level.
First, a little about RCS. RCS is managed by Allianz Global Investors Fund Management LLC, and the fund is comprised of high-quality, intermediate-term U.S. debt securities. The fund may also invest in mortgage-related or other asset-backed securities, including mortgage pass-through securities and collateralized mortgage obligations, as well as non-US government and corporate debt. It is currently trading at $11.02/share and pays a monthly dividend of $.08/share. This translates to an annual dividend yield of 8.71%. Year to date RCS is down close to 3%, excluding dividends, and over the past 52 weeks is down just over 1%. While these figures are negative, an investment over each of these periods would be profitable overall because of the generous dividend.
RCS is attractive to me for a few reasons related to its dividend. One, the yield has increased with the recent drop in price, so new investors have an opportunity to get a higher yield in a fund that has a solid history of paying out dividends. Two, its monthly payout gives investors cash (or reinvested stock) at a quicker pace than a normal stock, which is always a beneficial. Finally, RCS has a history of paying a special dividend in December that greatly increases the annual yield of the fund. While this amount often varies, it is an extremely attractive characteristic.
There are some key reasons the fund has not performed strongly over the last few months. First, bond yields have been rising in the short-term. This is important because bond prices have been low, which has pushed investors who normally look for safe yields in a bond environment to search for dividend paying stocks to find a new source of steady revenue. With the rise in bond yields, investors have started to become attracted away from high yielding stocks and ETFs and back into those traditionally stable assets. If this trend continues over either the short or long term, funds like RCS will most likely be big losers. Second, RCS currently trades at a 17% premium to NAV. While this is a seemingly high figure, it compares to a 19% premium a month ago. Also, rivals such as the PIMCO Global Stocks PLUS & Income Fund (PGP) trade at much higher premiums. For example, PGP currently trades at over 47% NAV, a much higher premium that is not worth the additional dividend yield the fund provides, in my opinion. Third, the fund can allocate up to 20% of its assets into emerging market debt and securities. This exposes investors to international risk, both political and economic, given that emerging markets are some of the most volatile in the world. Based on how far the market has risen, and the increasing tensions in areas like Syria, North Korea and China, coupled with the ongoing debt crisis in Europe, I feel these risks are going to impact the market very negatively over the next few months.
That being said, RCS still represents an attractive investment. The fund's beta of .36 and its high dividend yield bode well for the stock, even as investors shift to bonds. Funds like PGP, which collapsed over 6% on Wednesday, will fair far worse because they are riskier funds that do not provide as much protection for risk averse investors as RCS does. The market's action on Wednesday proves this, as RCS was only down 1.61%. Additionally, RCS is at its resistance level of $11.00, a level not seen since the middle of March. After RCS hit this level, the fund rebounded sharply, and it responded similarly in late 2012 after a brief drop below that level. RCS has not had a prolonged period of trading below $11 since 2011, and even then it was in the high $10s.
As you can see, $11 represents an attractive entry for the fund, as it tends to trend above that level, while still maintaining a high dividend payout. If we see a drop below $11, the next resistance level is around $10, which the fund has managed to stay above for years. While I normally invest strictly on fundamentals, this price action is currently too compelling for me to ignore.
Bottom line: The recent drop in RCS has not been without merit. If bond yields rise, and/or if dividend payments begin to decrease, RCS will certainly see some selling pressure. However, I feel the fund will outperform its nearest competitors because it offers a stable yield with a low beta, and also pays its dividends monthly, with an attractive year-end special dividend. This is something standard U.S. dividend paying companies simply cannot match. The recent drop represents a clear opportunity for investors to initiate new positions in RCS.