Friday afternoons and weekends have long been observed as an opportune time for low profile public companies and Closed-End Funds to disseminate undesirable but market-relevant news. The conspiracy theory explanation infers that if nobody is around on Friday afternoons and that the news will be ignored or forgotten by the time Monday rolls around. I’m not a big believer in the theory, but I attempt to be alert at all times.
Friday, Montgomery Street Income Securities, Inc (MTS) announced a distribution cut from 22 cents to 17 cents. Based on Friday’s $17.53 closing Net Asset Value (“NAV”), the new distribution represented an annualized rate of nearly 3.8%, down from an excess of 5%. MTS is a Closed-End Income Fund, a peer group which frequently trades on yield.
I am long one Allianz family Closed-End Fund, NFJ. Short-Selling generally comprises around 1% of my overall investing picture, and I frequently use Closed-End Funds among underfollowed securities for long positions. But, if or when I believe to anticipate that demand of a Closed-End Fund is likely to wane, I will open short positions based not on fanfare, but on objectivity. I am short MTS because I believe its shares will trade largely on yield.
Moreover, I am short with contemplation of governance at MTS and other Allianz family Closed-End Funds. Among Allianz’s Closed-End Funds, I am also short Allianz’s Pimco Global Stocks Plus (PGP) which trades at a greater than 60% premium to its NAV, and bought another call-writing fund (NFJ) which having cut its own distribution to now pay only about 3.2% annually on Friday’s closing $18.70 in NAV now trades at nearly a 15% discount. PGP and NFJ have somewhat similar NAV charts, and generally fit into the same option strategy category of Closed-End Funds. Allianz has been unwilling to explain the governance variances upon request.
Interestingly, PGP has an open-end counterpart which may benefit from the illusory value of a sister Closed-End trading at a premium. An open-end sister fund was also present while Alpine’s AOD traded at a massive premium prior to eventually making meaningful slashes to its distributions.
The back-story on Allianz’s Closed-End Fund governance is only a portion of my MTS short thesis. At the MTS annual shareholder meeting on July 8th, MTS shareholders had been asked to, and did approve a new investment advisory agreement between the Fund and Pacific Investment Management Company LLC (“PIMCO”). Shareholders were also asked to, and did approve the revision or elimination of certain of the Fund’s current fundamental and other investment policies.
The MTS annual shareholder report demonstrates those changes became effective September 15th. Friday’s distribution declaration was the first since changes became effective.
For the record, my short positions in each MTS and PGP are each just a couple hundred shares or so. I wish no ill-will on any of their shareholders and I welcome all comments as challenges to my thesis. My thesis calls for a long, slow bleed in MTS relative valuation as Institutional Holders such as SIT Investment Associates (whose most recent 13-F reported owning nearly a million shares), 1607 Capital Partners, and Claymore Advisors may be in an undesirable position for which they would recognize the illiquidity challenges of a prompt exit. In contrast, Claymore Advisors most recent 13-F reports a somewhat lonely institutional position in PGP. If and when PGPs distribution reflects a similar governance stance to NFJ, there is a different shareholder base whose reaction I believe would involve less patience.
Disclosure: Author long NFJ and short MTS and PGP
Disclaimer: This thesis has not been licensed to any hedge fund or other institutional investor. I did mention position(s) in Covestor's Closed-End Fund webinar. My long position in NFJ and short positions in MTS and PGP along with other portfolio and trading activities have been and are licensed as data to Covestor Ltd. (“Covestor”). Covestor is a Registered Investment Advisor that uses my trading data in effort to replicate some actions for its retail investing clients in various models.