- AllianzGI NFJ Dividend & Interest Premium Common Fund returned 74% of distributions in the form of Return of Capital, potentially eroding the net asset value if continued through 2014 and015.
- NFJ should be placed on every prospective investor's watch-list and to be reviewed after the second quarter of 2014 for new investment positions.
- NFJ's discount to net asset value is now within the 1% range, prompting new and different market trading values if held constant through 2014 and 2015.
My first article on AllianzGI NFJ Dividend & Interest Premium Common Fund (NYSE:NFJ) was published on November 10th, 2013, and in that article (article found here) I highlighted a couple of considerations before buying more of the closed end fund including: 1) the distribution frequency, which is quarterly versus the monthly preference I have for the majority of my investments, and 2) the composition of the distributions, which at the time were composed of Return of Capital (ROC) and Fund Income. In this article, I wanted to touch up on my previously mentioned concerns and other considerations for prospective investors since it is that time of the year to make strategic long-term investment decisions for optimal portfolio utilization.
First, to address the quarterly distribution frequency. I'm still not a fan of quarterly distributions and the reason or that is very simple: I like to take my dividends and reinvestment them into more shares to increase my monthly distributions for the following month and decrease my portfolio's leverage ratio. I currently maintain a leveraged payout portfolio (this is when the equity value of the portfolio is leveraged using overnight margin to yield 1% to 100% more than its non-levered yield (I'm generally levered by 30%, like many CEFs, which create a leverage on leverage position)), and when the distributions are made monthly I can book up to 4% more distributions at the end of the year on top of my other distributions (yes this is a bit of a risky strategy if not maintained accurately, but I've been doing this for five years and this is my strong suit). So, if you are an investor like myself or even an investor seeking to increase monthly income slightly, the leveraged payout strategy is a way to increase returns while borrowing at the margin rate of your brokerage firm, which is generally very cheap and almost unnoticeable in small leverage ratios (once you start leveraging above 45% it becomes very noticeable long-term).
Second, the distribution composition and my concerns for 2014 and 2015 distributions. When I published my last article, the 2011 ROC made up 34% of the year's total distributions, the 2012 ROC made up 59%, and 2013's ROC was reported as 74% of the total distributions (source: Morningstar Direct). By now readers can see why I'm a bit concerned about NFJ; the ROC is increasing year on year and the fund income is decreasing in tandem (for visuals on distribution composition view this web page for some visually concerning distribution compositions). So, before setting off the alarm and triggering an overactive sell directive, I chimed in on why the ROC may have been increasing in the comments of my last NFJ article and I mentioned that the fund may be trying to close the gap between the market price and the net asset value of the fund and based on how the fund's price has moved recently the fund has definitely succeeded at closing that gap because NFJ is currently trading at a -0.38% discount (versus the 3 year average discount of -4.94%). Now that the fund trades within a 1% range of the net asset value, in theory the fund's attempt at decreasing the ROC should be expected, but that is currently my big concern since ROC made up 74% of the fund's distributions in 2013 and may continue to make up the fund's distributions in 2014 and 2015, creating somewhat of a destructive value proposition to investors and eroding long-term net asset value (and position value for investors).
Based on the two concerns mentioned above, I have determined that buying more shares may not be the most appropriate decision for a portfolio like mine and should not be appropriate for investors that already have positions in NFJ (and for investors with no leveraged portfolio positions). From a market entry perspective, it would be most appropriate to put NFJ on your watch-list and up for review after the second quarter of 2014 when distribution compositions are more up-to-date and reflective of the fund's performance/distributions.