As a value investor, I enjoy picking stocks. I enjoy the process of selecting companies that I feel the market has temporarily mis-priced. With that said, I do select a fair amount of funds for my portfolio as well. I have found that using exchange-traded funds provides needed diversification and exposure to otherwise unreachable segments of the market. Traditionally, I have not been a big fan of closed-end funds. They typically trade at low volumes, thereby creating liquidity issues. They often trade at a distant premium to net-asset value (NAV). Recently, though, I have found a closed-end fund that I can get behind.
I came across the fund in Barron's 2011 Roundtable (part 2); All Over The Map, January 22nd. The Pimco Corporate Opportunity Fund (PTY) is managed by Bill Gross, Founder and Co-Chief Investment Officer of Pimco. PTY was listed as one of two picks from Bill Gross in the article. Let's look at the details of the fund.
Pimco Corporate Opportunity Fund
PTY seeks current income and capital appreciation. The fund invests in US dollar-denominated corporate debt obligations and other corporate income producing securities. Normally, the fund will have an average credit quality that is investment grade. PTY currently yields 7.3%.
PTY currently has a Morningstar Rating of five stars for three years, five years, and overall performance. Morningstar rates the fund as having average historic risk with high historic performance. PTY is up 24% over the last twelve months.
PTY currently holds $1.1 billion in assets and is actively managed by Bill Gross.
Top Ten Holdings
|Name||Maturity Date||Percent of Holdings|
|Amer Intl Grp FRN||05/15/68||2.60%|
|Bay Area Toll Auth 7.043%||04/01/50||2.30%|
|Riverside Calif Elec Rev Rev Bds 7.605%||10/01/40||2.30%|
|Amer Intl Grp 8.25%||08/15/18||2.00%|
|Cobank Acb Pfd 144A||--||1.80%|
|Citigroup Cap Xxi FRN||12/21/77||1.50%|
|Gsr Mtg Tr 2006-1f CMO 6%||02/25/36||1.50%|
|Rabobank Nederland 144A FRN||06/30/19||1.30%|
|Panamsat Corp New 6.875%||01/15/28||1.30%|
It is important to note that PTY uses leverage, currently at about 37%. This means that because the fund borrows at low short-term rates to purchase longer dated assets, a spike in short-term rates could hurt performance. I don't see short-term interest rates rising substantially in 2011.
Gross, in the Barron's article, says "if you want to double your money in six years, after reinvesting both the dividends and the proceeds, I don't know a safer way to do it. If you had to put your mother-in-law in something, this would be it". Gross also noted that he is not on the board of this fund so he does not have a say in the dividends declared. In a vote of confidence, Gross says that the dividend rate should continue in this fund.
PTY also paid two special dividends last year, making the distribution yield around 12% instead of the 7% listed for the fund. Including dividends, the fund returned 33% last year.
I have not been a fan of bonds recently. The main reason for my discontent with bonds is the paltry yields that most now pay. The other reason I haven't liked them is that the stampede into bonds seems overdone. I personally have a more bullish viewpoint on the American economy than Mr. Gross and see it beginning to perk up. However, I have learned that it is not wise to invest all your money solely on your own viewpoint. I have no problem allowing Bill Gross to manage a portion of my portfolio through a fund such as this. The expense ratio for the fund is 1.23%, a fair rate for an astute fund manager.
PTY has surged since the article ran in Barron's nearly two weeks ago. I would not buy the fund until the price comes back down into the $18 - $18.50 range. At the time Bill Gross made his recommendation, PTY traded at a premium of 5% to net asset value. The fund has traded at a premium as high as 20%, according to Gross.
PTY is a solid corporate bond fund. The yield is good and seems to be sustainable. It has an excellent manager with many years of bond experience. Although the management fee is higher than many ETFs, I think it is well worth it for the active management of Bill Gross.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.