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  • PHK - The Destruction Of Value By Paying A Premium - A Look At The Numbers. 0 comments
    Nov 19, 2012 6:32 PM | about stocks: PHK, JNK, FHY

    Since PHK jumped to obscene premiums above its NAV some 3 years ago, anyone who bought this fund at premiums of 40% or higher (apart from the lucky few who bought it when it was on the verge of self liquidation before the Fed rescued us all from the abyss) have suffered sub-par returns vs. peers.
    For all the "religious" holders on this board who think they are not playing this game with their money because they bought it so cheaply a few years ago and thus are sitting pretty, a look at the following numbers will show you the terribly high "opportunity cost" you have been paying by sticking with a much overvalued investment instead of picking discounted CEF's or even more astonishingly, un-leveraged HY ETF's.
    here are the total return numbers (with re-invested dividends):

    PHK FHY JNK

    11/18/11 - 11/1912 0.09% 28.76% 14.02%

    05/19/11 - 11/19/12 -8.27% 26.35% 9.32%

    11/19/10 - 11/19/12 6.47% 44.63% 16.55%

    05/19/10 - 11/19/12 32.40% 67.69% 30.20%

    11/19/09 - 11/19/12 47.70% 76.81% 36.58%

    As you can see, the high premiums paid by PHK's shareholders have caused them to LAG badly other CEF's in the same arena and because of such high premiums, even an unleveraged ETF like JNK was able to generate better total return numbers (with NO leverage) over the past 2 years.
    If we would leverage JNK with the amount of leverage PHK is using, JNK's numbers would also be better than PHK's for the past 3 years.

    The lesson is this : buying something at premiums of 40-50-60-70% over its intrinsic value (NAV in this case) is very detrimental to future performance numbers.
    Sure, premiums can sky rocket higher with no regard to reality (and they have over the past few years) but like all bubbles they are bound to revert to the mean which is the NAV.
    CEF's have traditionally traded at discounts to their NAV until the exit from the financial crisis of 2008-2009 when the ZIRP policy pushed many uninformed investors to "chase" yield and ignore the risk associated with paying such premiums for it.
    The results are shown above.
    Apart from one stellar year that could and should be considered a one-off event (2009) after the recovery from the verge of annihilation at the height of the financial crisis, PHK has mostly been a mediocre fund compared to its peers and mostly traded at discounts to its NAV (or slight premiums for short periods of time) - like any other CEF.
    The '"turbocharged" distributions made people disregard valuation metrics and pay up ridiculous premiums for this fund.
    The table above shows that once 2009 is taken out of the equation (it was a GREAT year for PHK and I congratulate anyone who bought early that year cheaply), anyone who bought or held PHK for the past 12-18-24-30 and 36 months has done EXTREMELY POORLY for him/her self compared with alternatives , both on an absolute basis and on a risk adjusted basis.

    Disclosure: I am short PHK.

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