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There are quite a few over-priced closed-end funds trading now which pay out high distribution rates, usually produced by gimmicks. I reported on several funds that used dividend capture a few weeks ago. Another closed-end fund selling at a large premium over NAV is the PIMCO Global StocksPLUS & Income Fund (PGP).

This fund takes an “innovative” approach to generate artificially high dividend payouts that has attracted strong support from retail investors. They do not invest directly in equities. They invest in futures contracts (50% S&P 500, 50% MSCI EAFE) using a short-term bond portfolio as collateral for the derivatives exposure. The bond portfolio has an average duration of about two years and includes emerging market bonds. They then write call options on the US equity portion to generate additional income from option premiums. They use about 33% leverage to increase the dividends generated.

Recently PGP has generated good market performance mainly because the shares have traded from a discount to a large premium over NAV.

11/28/2008 Discount to NAV of= -18.34%

11/11/2009 Premium over NAV= +65.14%

This is an 83% swing. Closed-end fund discounts and premiums over NAV usually revert to the mean, so PGP looks dangerously over-valued here. The shares are difficult to short, so I would not necessarily recommend a short sale, since the shares could be subject to a forced buy-in.

Pimco Global StocksPLUS&Inc pays monthly

  • Common Assets= 107 MM
  • Total Net Assets= 162 MM (uses 33.6% effective leverage)
  • Annual Distribution (Market) Rate= 12.22%
  • Income Only Yield= 3.43%
  • Baseline Expense ratio= 1.88%
  • Premium over NAV= +65.14%
  • Portfolio Turnover rate= 214%

Full Disclosure: No position in PGP

Source: PIMCO Global StocksPLUS & Income Fund Looks Overvalued