The purpose of this article is to determine the attractiveness of Pimco Corporate&Income Opportunity Fund (NYSE:PTY) as an investment option. I will review PTY's recent performance, fund characteristics and holdings, and current trends to attempt to determine where PTY may be headed from here.
First, a little about PTY. This fund invests at least 80% of its total assets in a combination of corporate debt obligations, both short and long term, corporate income-producing securities, and income-producing securities of non-corporate issuers, such as the U.S. government securities, municipal securities and mortgage-backed securities. The fund is managed by Allianz Global Investors Fund Management LLC. PTY is currently trading at $18.60/share and pays a monthly dividend of $.13/share, which translates to an annual yield of 8.4%. Year to date the fund is down close to 4.5%, excluding dividends, and over the past 52 weeks the fund is up close to 3%, also excluding dividends.
Essentially, PTY's performance has been mixed. While the stock price return has been negative year to date, once dividends are factored in the total return is essentially flat, and over a longer stretch the fund has produced positive returns for investors. Recently, the stock has taken a big hit as it is down almost 16% in the last month. Much of this has to do with the fact that bond yields are rising in the U.S., so many investors who left bonds in search of higher yields are now returning. This has hurt dividend paying ETF's and companies in the immediate short-term. However, I feel this risk is being overblown. I do not see the Fed substantially increasing interest rates this year, especially given the fragile recovery and less than stellar employment number that came out on 6/5. Additionally, U.S. treasury yields are still under 3%, for the most part. Therefore, while some may flee for safety, many investors will still be in search of higher yields and dividends payments that add up to over 5% annually. Long-term, I see dividend paying ETFs such as PTY continuing to be attractive, so I am buying this dip.
There are multiple reasons why I prefer PTY. One, it pays its dividends monthly, which is an advantage over owning stock in a U.S. company that pays its dividends quarterly, or even funds like SDY or DVY, that yield 3%, but also pay out quarterly. This gives investors cash (or reinvested stock) sooner rather than later, which is always a benefit for the investor. Second, when compared to its peers at PIMCO, PTY trades at a much lower premium to NAV, currently at 7.33%. While this premium may seem high to an average investor, it compares attractively to premiums of other popular PIMCO funds RCS and PGP, which trade at premiums of over 11% and a whooping 42%, respectively. In my opinion, if a further correction does occur among dividend paying equity assets, PTY will be better shielded than its competitors from this drop. When the market drops, funds that have higher premiums over NAV and stocks that have the highest PE ratios, tend to fall the hardest. PTY, with a lower premium and a beta of .92, which is lower than the market as a whole, should far better in a bear market. Take Wednesday for example, PTY was up .81%, while the DOW was down over 1%. Finally, another reason I like the fund is that, while it invests primarily in U.S. backed government and corporate securities, investors can also gain international exposure. PTY can invest up to 25% of total assets in non-U.S. dollar denominated securities, 10% of which can be allocated to emerging markets. Having this exposure is imperative, in my opinion, because emerging markets provide higher growth rates and it diversifies the fund from relying exclusively on the U.S.
Investing in PTY is not without risk. While I mentioned that I feel the possibility of bond yields rising considerably is low, that is still a very real risk to funds such as PTY, and others. If yields do rise and investors begin to reallocate away from equities, the fall from grace could be painful. PTY is also heavily weighted toward the banking industry, with 14% of its assets in that sector. While large U.S. banks have performed remarkably well over the last couple years, this fund is overly reliant on that sector, so a rise in rates would hurt PTY disproportionately, given that this sector's performance has been driven largely by low interest rates. Additionally, more stable sectors, such as utilities, make up only 1% of the fund. This is a sector that is notoriously reliable and has strong cash flows, so I would love to see the fund increase its exposure in this sector. However, these funds do not reallocate as often as actively managed mutual funds (a benefit or a detriment depending on how you look at it), so I do not expect that to change in the near term.
Bottom line: Investors will continue to search for high yields in equities and ETF's, with or without a rise in bond yields. PTY's annual yield of over 8% provides steady income and the recent drop in price provides an attractive entry point for new investors in the fund. While this fund is susceptible to some volatility over the next few months, given that its premium over NAV is lower than other, similar funds, PTY should hold up better than most. Coupled with the fact that PTY does have some international exposure, investors should consider initiating new positions at these levels.
Disclosure: I am long DVY, PTY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.