Recently the PIMCO Total Return Fund, the world’s largest, experienced its first calendar-year outflows since its inception in 1987. The fund is operated by Bill Gross and manages about $240 billion. The outflows were likely caused from some bad bets made by Mr. Gross in early 2011, when he predicted declines in US Treasury bond prices. US Treasuries turned out to be one of the best performing asset classes in 2011.
Nearly two years ago, I wrote an article about the Pimco Closed-End Fund “Anomaly”. I did an update of this study over the weekend to see whether the fund outflows in Pimco’s open-end mutual funds have carried over to their closed-end funds. I was surprised to find out that the opposite has occurred, and the average premium has actually expanded since then.
Normally, most closed-end funds (CEFs) trade at a discount to net asset value, but Pimco funds are an exception to the rule and usually trade at a premium above NAV. Back in March 2010, all 18 Pimco closed-end funds were trading at a premium over net asset value. (Note: I omitted funds that may be run by Allianz or sub-managed by Pimco but do not have “Pimco” in their names since these funds do not seem to benefit from the Pimco anomaly).
PIMCO Closed-end Funds Premiums
3/19/10 | 1/6/12 | Change | Type | |
PGP | 48.10% | 75.36% | 27.26% | Multi-sector |
PHK | 38.52% | 69.62% | 31.10% | High Yield |
RCS | 20.13% | 31.61% | 11.48% | Glbl Inc |
PTY | 8.87% | 28.16% | 19.29% | Inv Grade |
PCN | 6.44% | 26.37% | 19.93% | Inv Grade |
PCK | 9.53% | 20.30% | 10.77% | Muni-CA |
PMF | 11.91% | 17.58% | 5.67% | Muni-Natl |
PCM | 3.94% | 14.08% | 10.14% | Mtg |
PMX | 8.95% | 13.21% | 4.26% | Muni-Natl |
PKO | 1.15% | 11.79% | 10.64% | Multi-sector |
PNI | 4.88% | 8.39% | 3.51% | Muni- NY |
PFL | 11.87% | 7.24% | -4.63% | Multi-sector |
PZC | 2.77% | 7.07% | 4.30% | Muni- CA |
PYN | 1.90% | 6.65% | 4.75% | Muni- NY |
PCQ | 3.98% | 6.10% | 2.12% | Muni- CA |
PNF | 1.19% | 5.12% | 3.93% | Muni- NY |
PML | 5.64% | 4.14% | -1.50% | Muni- Natl |
PFN | 4.90% | 3.77% | -1.13% | Multi-sector |
Avg-> | 10.82% | 19.81% |
Note that 15 out of the 18 Pimco CEFs now have higher premiums than in March 2010. The average Pimco CEF premium has increased from 10.82% to 19.81%.
While many of the above premiums seem excessive, I believe that some premiums may be justified for several of the Pimco funds which have below average borrowing cost on their leverage.
There are many kinds of leverage used by closed-end funds- preferred, tender option bonds (TOBs), reverse repurchase agreements, bank loans and notes. Until a few years ago, a common form of CEF leverage was Auction Rate Preferred (ARPs). The auction process by which ARPs had been marketed failed in 2008 and has not revived since. ARPs currently offer some of the lowest leverage cost available.
Some fund families, like Nuveen, have replaced ARPs with other instruments like debt, tender option bonds (TOBs), Municipal term preferred (MTPs), Variable Rate Demand Preferred (VRDPs) etc. But in the current market environment these instruments usually have higher borrowing costs than ARPs. Pimco is one of the few firms that have kept their ARP financing which gives many of their funds a cost advantage. Pimco also uses reverse repurchase agreements which currently have very low borrowing rates.
Some metrics that may be useful to evaluate Pimco closed-end funds are the Average UNII (undistributed net income) per share and the recent earnings per share versus the latest distribution.
Here are two Pimco funds that score well based on these metrics which indicate that a distribution increase may be coming in the future:
PFN Pimco Income strategy II
Distribution Yield= 8.34%
Premium= 3.77%
UNII= 0.1197
Current monthly distribution= $0.065 Monthly earnings= $0.0817
PKO Pimco Income Opportunity
Distribution Yield= 8.75%
Premium= 11.79%
UNII= 0.7866
Current monthly distribution= $0.19 Monthly earnings= $0.27
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
