Bill Gross Is Buying PIMCO Closed-End Funds Again - Should You?

Includes: PCN, PDI, PFN, PTY
by: George Spritzer, CFA

According to recent SEC filings, Bill Gross just invested over $13 million of his personal funds in two Pimco closed-end corporate bond funds. There is a small reporting delay in SEC filings, and it is possible that Mr. Gross bought more Pimco funds on Friday, or will buy more Pimco funds next week. Instead of reporting each individual trade, Mr. Gross reported a weighted average price for each day's purchases and a high-low trading range.

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Bill Gross is a billionaire, but a lot of his assets are tied up in company stock or other illiquid assets. A $13 million purchase using liquid discretionary funds seems to indicate that Gross sees significant value in these funds. Large price drops were caused by a negative article in Barron's on closed-end funds selling at large premiums, including two Pimco closed-end funds: PHK and PGP.

I generally avoid buying closed-end funds selling at a premium over NAV, but occasionally make an exception for Pimco funds trading at a modest premium. One reason for this is that Bill Gross often supports his own funds with his personal money. In some ways, this is similar to "the Greenspan (or Bernanke) put." In this case, a "Bill Gross put" may apply to some Pimco closed-end funds.

In just a few days, the funds purchased by Mr. Gross have already appreciated nicely with an average profit of nearly 5%:

Shares Tkr Cost $ Invested 10/12/2012 $Value Profit %Profit
250,000 PCN 17.5283 $4,382,075 18.29 $4,572,500 $190,425 4.35%
391,561 PTY 19.3341 $7,570,480 20.41 $7,991,760 $421,280 5.56%
56,134 PTY 19.882 $1,116,056 20.41 $1,145,695 $29,639 2.66%
$13,068,611 $13,709,955 $641,344 4.91%

I reviewed the Pimco closed-end funds to look for some other funds that Bill Gross may purchase next week. Here are two Pimco closed-end funds that look attractive and are available at a discount or modest premium over NAV:

1) Pimco Income Strategy Fund II (NYSE:PFN)

-pays monthly

· Total Assets= 850 MM Total Common Assets= 632 MM

· Annual Distribution (Market) Rate= 8.59%

· Latest Monthly Distribution= 0.08 (annual= $0.96)

· Average Monthly Earnings per Share= $0.0934 (as of 07/31/2012)

· Fund Expense ratio= 1.21%

· Premium over NAV= +4.07%

· Average Six Month Premium= +5.71%

· Effective Leverage: 22%

· Average Daily Volume: 252,000 Average $ Volume: 2.8MM

· Manager: Bill Gross

2) Pimco Dynamic Income Fund (NYSE:PDI)

-pays monthly

· Total Assets= 2204 MM Total Common Assets= 1194 MM

· Annual Distribution (Market) Rate= 7.58%

· Latest monthly distribution= 0.177 (annual= $2.124)

· Fund Expense ratio= N/A

· Premium over NAV= -0.35%

· Average Six Month Premium= +2.95%

· Effective Leverage: 45.83%

· Average Daily Volume: 283,000 Average $ Volume: 7.9MM

· Manager: Dan Ivascyn

Disclosure: I am long PFN. 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.