PGP: Don't Pay The Massive Premium For This CEF

| About: PIMCO Global (PGP)


The PIMCO Global StocksPLUS & Income Fund currently trades for an astounding 80.4% premium to NAV.

With its high yield debt portfolio, the fund creates a high level of current income, which likely attracts investors.

This premium to NAV has fluctuated substantially in the past and is likely to continue to do so, yet it should ultimately revert to a level close to NAV.

As an alternative to mutual funds or ETFs, closed-end funds are unique in that they are able to trade for a sometimes sizable premium or discount to NAV. This is possible because these closed-end funds do not permit sales or redemptions in a way that mutual funds or ETFs do, and as such, investor demand has the ultimate control of the price relative to NAV. While many closed-end funds trade below NAV in order to discount the present value of future management fees, amongst other things, some funds trade for substantial premiums to NAV. The vast majority of closed-end funds trade in a close band around the individual fund's NAV, but there are certainly outliers. The PIMCO Global StocksPLUS & Income Fund (NYSE:PGP) trades at an astounding 80.4% premium to its NAV, while offering a yield of 13% based on market price or 23.4% based upon NAV. While it's hard to rationalize why investors would purchases shares of a vehicle that trades at such a substantial premium, my guess is that they are drawn in by the high dividend yield. Of course, a portion of this yield is comprised of a return of capital to shareholders, which continually takes away assets from the fund; however, the majority is actually from investment income from the firm's leveraged fixed-income portfolio, which creates a tax liability for shareholders. PIMCO does offer a dividend reinvestment plan that allows investors to reinvest their monthly dividends at the greater of NAV or 95% of the market price, which gives them the opportunity to effectively buy these expensive shares at a slight discount to the inflated market price. This fund trades for an irrationally high premium to its NAV, and prudent investors should absolutely avoid it. In fact, the fund could very well make a prime short candidate, provided that borrowing costs are reasonable.

PGP Chart

PGP data by YCharts

As PIMCO is one of the world's largest fixed-income fund managers, it makes sense that the company has a number of closed-end fund offerings within this space. PGP focuses heavily on high yield debt, which does bring in a substantial amount of current income for investors, but also exposes them to both credit and interest rate risk. Another interesting aspect of PGP is that the fund is highly leveraged to the tune of 42.9% of managed assets or 75.1% of net assets. This boosts the return profile of the fund in periods of asset outperformance; however, it means interest expenses for investors, as well as exposes them to excessive losses in the event of a high yield bond market downturn. As the market has seen, high yield has sold off rather significantly in recent months, and despite this, the shares of PGP have outperformed its underlying portfolio, which has, in fact, led to expansion of the premium. PGP has mitigated some of its duration risk by holding a large portion of its assets in shorter-term high yield debt, which has likely saved the fund from further losses on its portfolio. Management fees for PGP are just over 1.1% annually; however, this figure is actually based upon the total managed assets, i.e. the market price of the security instead of NAV. Including interest expenses, the fund's total expense ratio is 2.34% of its net assets. PGP is a rather small fund, with just $105 million in net AUM or $185 million in total managed assets, and as such, is likely more exposed to a potential mispricing of its shares.

PGP trades for a massive premium to its NAV, and prudent investors should avoid this fund. The premium has expanded in recent months, and a further deterioration of the high yield debt market could pose additional risk. While many investors in the fund are focused on the dividend yield, the dividend payments as a result of underlying fixed income coupons create a major tax liability even though investors are about to participate in the dividend reinvestment plan and purchase shares at a slight discount to market price. PGP's premium to NAV has fluctuated substantially, and is likely to continue to do so in the future. The long-term trend should be towards a lower premium or even a discount to NAV as this market inefficiency is realized in PGP.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.