Allianz Global Investors has been busy restructuring its equity Closed-End Funds (CEFs) over the past couple weeks. Just last Wednesday, September 18th, Allianz announced the liquidation of the AGIC International & Premium Strategy fund (NAI). NAI jumped 8% on this news overnight as its market price immediately moved up to near its liquidation Net Asset Value (NAV). You can read my article discussing this announcement here.
Then after the close yesterday, Wednesday, September 25th, Allianz announced the merger of two of its stock and convertible security CEFs, the AGIC Equity & Convertible Income fund (NIE) and the AGIC Global Equity & Convertible Income fund (NGZ), with the expected closing sometime in the 1st quarter of 2014.
Allianz announced in its press release that since both NIE and NGZ have identical investment objectives and substantially similar investment strategies, that...
It is in best interests of shareholders to merge NGZ with and into NIE in part because the combined fund may benefit from economies of scale, as one set of fixed expenses would be spread over a larger asset base."
Though the funds are similar, there are a couple differences. First is that NGZ has a global portfolio of stocks whereas NIE includes only US based stocks. Second, the funds have a bit different weightings in their convertible holdings with NIE at about 29% of its overall portfolio and NGZ with about 20% of its portfolio in convertibles.
Another difference is that NIE is far larger at $476 million in assets than NGZ at only $115 million, which is why NGZ will be absorbed into NIE and all shares of NGZ will be converted to NIE shares. This should all occur sometime in the 1st quarter of 2014 when NGZ will stop trading.
How To Play The Allianz Equity CEFs Right Now
This announcement essentially means that Allianz Global Investors will be managing only two equity based CEFs instead of four when all this is complete - NIE and the NFJ Dividend, Interest & Premium Strategy fund (NFJ). You can see all of the Allianz/PIMCO CEFs at this link, Allianz/PIMCO CEFs, and though the PIMCO Global StocksPlus & Income fund (PGP) is included under the equity sleeve of funds, PGP is really a bond fund that uses equity index derivatives.
I believe this news is good for NIE shareholders, bad for NGZ shareholders and overall negative for NFJ. In fact, I would be swapping out of NGZ at $15.62 now, slightly up after the fund initially dropped 4% on the news, and into NIE, which initially opened up 1% and now has dropped to slightly negative at $18.62. I would also be swapping out of NFJ and into NIE too, since NIE will be comparatively much more attractive based on its current valuation and new NAV yield that I think will result after the merger. This all has to do with the fund's current market prices and yields. Lets first take a look at the total return performances for all of the Allianz equity CEFs since January of 2012. Note: Though NAI will be liquidating, the fund will continue to trade until the termination is complete in mid October.
Here you can see that NIE has the best total return NAV performance over the past 21 months and yet trades at the widest discount, at -12.7%. The reason is because NIE has so much of a lower market and NAV yield, which actually makes no sense considering how much better NIE's NAV is performing both in the short term and longer term. In fact, for the past year, I've tried to get Allianz to explain why NIE has such a low NAV yield (5.25% currently) when all of the other Allianz equity funds are able to offer much higher NAV yields, and hence market yields. Frankly, if any of the Allianz equity CEFs should have a higher NAV yield, it should be NIE based on its performance.
But be careful what you wish for because I believe NIE will get its yield raised when the merger is complete, perhaps closer to a 7% NAV yield, which is lower than NGZ's current NAV yield at 7.3%, but quite a bit higher than NIE's current 5.25% NAV yield. Frankly, if NFJ can maintain a 9.9% NAV yield then the new NIE should be able to support a 7% NAV yield, even if NFJ brings in more income because of its higher use of an option writing strategy. If that happens, then look for NIE to trade at a significantly higher valuation than a -12.7% discount, which it should have never been at in the first place considering its NAV performance.
Though we have not seen the details of how the merger will be structured and priced, Allianz did include in its press release this statement...
If the Reorganization is approved, shareholders of NGZ would receive common shares of NIE, based on each Fund's respective net asset value per share.
The way I read that is that NGZ shareholders will receive a lower ratio of NIE shares because NIE currently has a $21.34 NAV and NGZ currently has a $16.36 NAV. That works out to a 0.767 conversion if the merger were based on those NAV prices. In other words, NGZ shareholders would get 767 shares of NIE for every 1,000 shares of NGZ they own to keep the NAV ratio equal and their investment interest equal. Understand, this has nothing to do with the market prices other than NGZ shareholders will receive the same ratio of common shares as the NAV ratio. I'm not sure how else you do this since NIE shareholders should not see their interest diluted.
It's not NIE shareholder's fault that investors have pushed NGZ's market price to a much higher valuation than NIE's when obviously some were speculating Allianz might announce a liquidation of NGZ instead of a merger. This was because NGZ had a similar market cap as NAI, both around $110 million, and the assumption was that Allianz might just go ahead and liquidate all of its smaller funds.
We'll see how this all shakes out and I would welcome any input from readers, but I would be careful with NGZ right now. There seems to be a lot of confusion based on the market price action today but I think the beneficiary in this are NIE shareholders.
Disclosure: Until Allianz Global Investors provides greater detail on how the merger is to be structured, any information contained in this article is conjecture on my part and you should NOT rely on my analysis to make any investment decisions on any of the funds mentioned.
Additional disclosure: Short NFJ