PIMCO Closed-End Fund Premiums Under Pressure

by: George Spritzer, CFA

I have previously written about the Pimco Closed-End Fund “Anomaly”. The majority of closed-end funds (CEFs) trade at a discount to net asset value, but Pimco funds are an exception and usually trade at a premium above NAV.

But recently many Pimco CEFs have been losing some of their mojo, and premiums have been under pressure. On June 3, Merrill Lynch started coverage of Pimco High Income Fund (NYSE:PHK) with an underperform rating. It felt th6at the 16% distribution on NAV was unsustainable. The price of PHK started falling dramatically, and I wonder if there has been a carryover effect to other Pimco CEFs at a premium.

Here are the changes of the five Pimco CEFs with the highest premiums between June 3 and June 13:

June 3 67.71%
June 13 52.08%
June 3 58.40%
June 13 40.26%
June 3 23.92%
June 13 21.29%
June 3 20.77%
June 13 16.89%
June 3 19.61%
June 13 20.41%

Note that all five funds had a significant decrease in their premium except for PTY. PTY was recommended by Bill Gross in the mid-year Barrons Roundtable over the weekend, which caused a “pop” in price on Monday. On June 10, the PTY premium had actually shrunk to 15.23%.

Back in April, Pimco submitted an SEC filing for a new active ETF similar to Pimco Total Return (TRXT). This ETF may be quite popular and will most likely trade close to the net asset value of the fund. It will provide a strong alternative for many Pimco CEF investors. Some professionals may set up pair trades where they go long TRXT and short a basket of Pimco CEFs selling at a premium.

But it may be too early to say the Pimco CEF premiums will be going away completely. The Pimco funds are performing well today during the bounceback rally on June 14. Here are the daily price changes as of 3PM:
PGP +4.60%
PHK +4.58%
PCK +0.11%
PMF +0.31%
PTY +2.53%

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.