Seeking Alpha
Retirement, closed-end funds, dividend investing, portfolio strategy
Profile| Send Message|
( followers)  

Taxable-income closed-end funds took a massive hit across the sector last April -- a hit that was well out of proportion to market realities. Nearly all saw market prices fall sharply, well in excess of the reductions in net asset value {NAV}. CEFs from two reliable fund sponsors, PIMCO and DoubleLine, went from consistent premiums to sharp discounts. Recent weeks have seen a bit of recovery. Some have moved back into the premium range. But, apparent bargains remain.

Using data from cefconnect.com, I compiled the following table of two DoubleLine and five PIMCO income funds.

Fund

Symbol

NAV

Last Close

Premium/ Discount

52-week average P/D

Market Yield

Distribution

Pays

DoubleLine Credit Opportunities

DBL

$22.43

$22.76

1.43%

6.74%

8.87%

$0.1670

M

DoubleLine Income Solutions

DSL

$21.78

$20.45

-6.11%

-1.74%

8.80%

$0.1500

M

PIMCO Dynamic Credit Income

PCI

$23.42

$21.36

-8.80%

-3.63%

8.80%

$0.1563

M

Pimco Dynamic Income Fund

PDI

$30.48

$27.63

-9.35%

-2.26%

7.66%

$0.1770

M

PIMCO Income Strategy Fund II

PFN

$9.97

$10.07

1.00%

4.02%

9.47%

$0.0800

M

PIMCO Income Strategy Fund

PFL

$11.25

$11.45

1.78%

5.11%

9.36%

$0.0900

M

PIMCO Income Opportunity

PKO

$27.40

$27.97

-2.04%

3.63%

8.30%

$0.1900

M

Yields at current prices range from 7.66% for PDI to 9.47% for PFL. All have been stable payers of distributions with no reductions in monthly distribution for at least 2 years or, for the more recent funds, since their inception. It may be possible to lock in these returns at this time with relatively little risk of capital loss.

One of the primary things I look for in buying a CEF is its current premium or discount in relation to its average premium/discount for the past 52 weeks. I want to see it below the 52 week average at a minimum.

Symbol

Premium/ Discount

52-week average P/D

Change from Average

DBL

1.43%

6.74%

-531 bps

DSL

-6.11%

-1.74%

-437 bps

PCI

-8.80%

-3.63%

-517 bps

PDI

-9.35%

-2.26%

-709 bps

PFN

1.00%

4.02%

-302 bps

PFL

1.78%

5.11%

-333 bps

PKO

-2.04%

3.63%

-567 bps

As the table above shows, each is well below its average selling point in relation to its NAV. Three have moved back into premium range since mid-August, but are still well under their average premiums.

A too-often overlooked metric for CEFs is undistributed net investment income per share (UNII) which can provide insight into the sustainability of the distribution stream. This is a far from perfect metric, and difficult for the individual investor to interpret. The published figures are typically months out of date and come with little explanation or history. Some investors respond by simply rejecting out of hand any fund with negative UNII. I tend to look at UNII in relation to distribution. I like to see UNII/share in the positive range, obviously, but if a fund makes monthly distributions (as all of these do), I'll accept a negative UNII that doesn't drop below a single month's distribution amount. Ideally, it should be half that. None of these funds have UNII/share more negative than their monthly distributions, and two (PDI and PKO) are in the positive range. Three of them fail the "no more than 50%" test. The clear winner by this admittedly subjective criterion is PDI with a positive UNII equivalent to 2 and a half months' distributions.

Symbol

UNII/share

UNII per share / Distribution per share

DBL

-$0.1362

-0.82

DSL

N.A.

N.A.

PCI

-$0.1083

-0.69

PDI

$0.4448

2.51

PFN

-$0.0044

-0.06

PFL

-$0.0117

-0.13

PKO

$0.1198

0.63

One final point that stood out for me is the impressive 1 year total return on NAV for PDI (26.26%) and PKO (15.35%). The other PIMCO funds with more than a year's record are in the high single digits (PFN at 8.25% and PFL at 7.76%). DBL did not fare so well here having lost 1.2% on total return to NAV over the past year. Neither DSL nor PCI have a year under their belts yet (inception for DSL is April 2013 and for PCI it's Jan 2013) so there's nothing to see here. Certainly one cannot expect a repeat of that sort of return from PDI or PKO in the coming year, but past performance does speak to the quality of management that has been able to produce those returns.

One finds the trend to increased discounts (or reduced premiums) has occurred across the board for the many income CEFs. I've focused on PIMCO and DoubleLine, but there are other funds that appear to be equally attractive. Interested investors will want to look at Helios High Yield (NYSE:HHY), Helios Advantage Income (NYSE:HAV), Helios High Income (NYSE:HIH), Western Asset High Income Opp. (NYSE:HIO), Western Asset High Income (NYSE:HIX) and Franklin Limited Duration (NYSEMKT:FTF). Each has current price, discount/premium and yields comparable to the funds described above. And each has had stable distribution payments and reasonable UNII/share. I'm sure I've missed other attractive opportunities in this space. There were, however, others that didn't fare well in my survey, mainly because I considered the yields insufficient, the funds had recent distribution reductions, or current distributions seem to be of questionable sustainability. This set includes Transamerican Income Shares (NYSE:TAI), Putnam Master Intermediate Income Shares (NYSE:PIM), Putnam Premier Income Trust (NYSE:PPT) and First Trust Mortgage Income Fund (NYSE:FMY).

While I tend to think there are opportunities here, one must keep in mind that sustaining past performances in a rising interest rate environment will be problematic. Much of the successes enjoyed by the PIMCO and DoubleLine income funds in recent years is a direct consequence of smart investing in the unique, ultra-low rate environment of the QE era. The question is how well will these management teams respond to the changed climate. I'm long PDI and PFN, have been for a while, and I watched with horror as the bottom fell out. But I held onto my positions and am hopeful for the future. Hopeful enough that I've recently increased my position in PDI with the view that the carnage in market response had reached bottom and the team running the fund is solid. Market prices have picked up, but it remains to be seen how the NAVs respond.

Finally, I remind readers that I am not a professional and I am most certainly not offering advice. I'm simply sharing my thoughts and research. Anything you may find interesting here will need your own thorough research and due diligence to determine if it may be appropriate for your portfolio.

Source: PIMCO And Doubleline Income CEFs: 7.5 To 9.5% Yields At Bargain Prices