Equity CEFs: Which Allianz/PIMCO Funds Offer The Best Risk/Reward (Part II)

Includes: NFJ, NGZ, NIE
by: Douglas Albo

This is the second of a two part series reviewing the Allianz/PIMCO equity based high yielding Closed-End funds (CEFs). The first part, which covered the PIMCO Global StocksPlus & Income fund (NYSE:PGP) and the Allianz International & Premium Strategy fund (NYSE:NAI), you can read here.

This article will focus on the last three Allianz/PIMCO funds, but before we get started, here are all five of the funds sorted by their Premium/Discounts, including other relevant information such as year-to-date NAV & market price performances and NAV & market price yields. All information is as of July 6, 2012.

Moving on to the next fund to review after PGP & NAI is the largest of all the Allianz/PIMCO CEFs, the NFJ Dividend, Interest & Premium Strategy fund (NYSE:NFJ), checking in at $1.6 billion in total assets.

NFJ is a fund I have liked for a long time and it's a good example of how a fund can turn things around after cutting its distribution, re-building its Net Asset Value (NAV) and then restoring its high distribution, all in the span of about 3 years. NFJ was, in fact, the first article I wrote here on Seeking Alpha after they restored their distribution back in December of 2010. Here is that article.

Like most of the Allianz/PIMCO equity CEFs, NFJ is an option-income fund that also includes a percentage of its portfolio in convertible preferred securities. In NFJ's case, about 24% of the portfolio is in convertibles and most of the rest is in well known large cap US based stocks. You can see the portfolio breakdown for all of the funds in the table above, or for more specific portfolio information, you can go to the Allianz website.

NFJ was one of those funds that every investor had a love/hate relationship with and not necessarily in that order. After slashing its distribution during the worst of the bear market in early 2009 by an unheard of 71%, from $0.525/share per quarter to $0.15/share per quarter, NFJ fell into purgatory with investors and suffered through -15% to -20% discounts for the next year and a half. But NFJ's managers had a plan and while NFJ was paying out a relatively low 3% to 5% market price yield during that time vs. 10% to 15% yields during its heyday, NFJ was slowly building back its NAV.

Then on December 21, 2010, NFJ largely restored its high distribution back to $0.45/share per quarter and as I wrote in my article, "restored the faith" to investors. NFJ has been trading at largely reduced discounts ever since. Here is NFJ's 5-year Premium/Discount graph showing the fund's narrowing discount over the past 3-years.

NFJ has been a great success story, however, recently the news is not as positive. So far this year, NFJ's NAV has been underperforming, up only 2.8% YTD through July 9, 2012 (includes the $0.90 in distributions paid YTD). For a fund that has the highest exposure to US based stocks of all the Allianz equity CEFs, this is a bit disconcerting. Though it's difficult to find a benchmark for NFJ with its 24% exposure to convertible securities, for comparison, the S&P 500 is up 8.9% YTD.

I'm not ready to change my opinion on NFJ but considering that NFJ's market price is up 14.6% YTD and has pushed NFJ's discount to just about par with its NAV, investors should be more concerned. In any event, I do believe there are better equity and convertible funds available to investors and that leads me into the last 2 funds from Allianz/PIMCO.

The last 2 Allianz/PIMCO equity based CEFs are the Allianz Equity & Convertible Equity Income fund (NYSE:NIE) and the Allianz Global Equity & Convertible Equity Income fund (NYSE:NGZ). Both of these funds' portfolios have similar equity/convertible weightings to NFJ's but with more global equity exposure, particularly NGZ. Considering the underperformance of the international markets vs. the US markets recently, the fact that both NIE and NGZ have had as good of total return NAV performance as NFJ YTD, is a positive sign (see table above).

Though both NIE & NGZ can write (sell) options up to 70% against individual stock positions in their portfolios, according to the fund's portfolio holdings dated June 29th, there is currently minimal covered-call writing being used, meaning the fund managers expect a stronger market environment going forward. That can change in an instant, but the bottom line is that both NIE and NGZ will see strong NAV upside in a global market recovery, more so than NFJ, which tends to maintain a large option coverage percentage no matter what the market environment.

Of the two, I much prefer NGZ at a wide -10.1% discount, a 9.3% market yield and a more global equity exposure to take advantage of any overseas market recovery. NGZ's small size at only $100 million can also be an advantageous for portfolio management as well as market price moves.

Compared to NFJ's Discount/Premium graph above, which is essentially a ramp up to a par valuation from the market lows in early 2009, NGZ's Discount/Premium graph is essentially a ramp down. Note: Graph only goes back to June of 2010 when Allianz took over the fund from Nicholas-Applegate.

You would think NGZ, as part of a family of funds that tends to get preferential valuation treatment, would get more respect, but as is often the case with CEFs, it's the funds that are overlooked that offer the best risk/reward.

Comparing NGZ's total return NAV performance to NFJ's over different market environments shows that the funds have had similar total return performances no matter what the US or international markets were doing. Here are the NAV performances from roughly the market high at the end of the 3rd quarter of 2007, and from roughly the market low at the end of the 1st quarter 2009. For good measure, I will throw in the Allianz International & Premium Strategy fund, a purely international fund I reviewed in my first article that has had very poor NAV performance but yet receives a premium pricing valuation.

So NGZ as a global fund has essentially matched NFJ's performance and yet trades at a much lower valuation. And compared to NAI, the NAV performances aren't even close. So why does NGZ suffer the worst valuation when, frankly, it should be one of the more deserving Allianz/PIMCO funds to trade at a higher valuation?

The bottom line is that of all the Allianz/PIMCO equity CEFs, NGZ has by far, the best risk/reward in my opinion. Here is a review of my recommendations of all 5 Allianz/PIMCO equity based CEFs.

  • PGP - Poor risk/reward
  • NAI - Poor risk/reward
  • NFJ - Average risk/reward
  • NIE - Good risk/reward
  • NGZ - Excellent risk/reward

Disclosure: Short NAI and I may initiate a long position in NGZ over the next 72 hours.