NCZ's current distribution rate is lower than NCV's; prompting a shift in investments.
New NCZ and NCV portfolio management policies raise performance concerns.
Overall, Neutral Hold for NCZ and NCV, but no recommendation for new investments.
In an article I published before the new year, titled: "Crank Up Your Portfolio's Yield With This Rock Star Fund" I highlighted how the fund was trading at a very attractive price solely due to the yield compared to its closed end fund peer group. Back in December 2013, AllianzGI Convertible & Income II Common Fund (NYSE:NCZ) was a very attractive buy for several reasons, including: 1) high monthly distribution rate (at 11.40% at the time of publication), 2) market price premium of +6.17%, which was lower than the 3 year average premium, and 3) that it was better than the other funds in its peer group. Well, some of those buying points have changed since my last publication which prompted the composition and publication of this article.
To review, the current market price of NCZ is $9.17, the distribution rate is 10.45%, and the last actual fund premium is +15.91%, which is much higher than the 3 year average premium of +9.80%. Additionally, in my first article on Seeking Alpha (titled: Buy AllianzGI Convertible and Income fund II If You Own and Love PIMCO High Income Fund), I explained how NCZ was a buy and it's brother fund, NCV, was a sell due to the distribution yield arbitrage opportunity and to be analytically correct, the table has turned for the two Allianz funds, finding NCV the more favorable purchase for long-term yield hungry investors at current trading prices. On top of more favorable distribution rates with NCV, the last actual premium is also at a more reasonable range at +9.3% vs. the +15.91% premium NCZ is boasting at current prices. So, for investors seeking to invest in the convertibles/bonds closed end fund space, NCV is the better investment when comparing the two.
In addition to the shift in closed end fund favorability, there have been recent news headlines that have raised a level of caution from my perspective when considering to invest in NCV and/or NCZ for the long-term (and especially retirement geared investors), which highlighted the rescinding of non-fundamental investment policies of portfolio maintenance (here is the article). Essentially, the Allianz funds are reducing the weighted average maturity down to five to ten years versus longer term notes. The article covers more details, but what this basically meant to me was that the portfolio managers running NCZ and NCV will be operating under more flexible portfolio management mandates, which basically means more risk and greater downside potential if the markets were to experience a global setback. I'm not sure about other investors, but this has raised a few concerns for me and the toughest thing about processing the impact is that I would need to wait until Allianz files their financial statements again to fundamentally understand how fund leverage, average weighted maturity, and distribution composition have or will change based on the recent newswire.
Overall, to conclude my update in high yield positioning, I wanted to reiterate that NCZ and NCV are great dividend distributors with a solid track record and potentially stable returns. Current holders of NCZ and NCV have the best end of the deal while prospective buyers may need to make several considerations before taking an investment position. Overall, NCZ and NCV are a Neutral Hold in my portfolio.
Disclosure: I am long NCZ, NCV. 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.