In the published three and six months results by PHK -http://www.businesswire.com/news/home/20121130005608/en/PIMCO-High-Income-Fund-Reports-Results-Fiscal - we can see that the fund has under - earned its distribution rate by 0.0931 for the 3 months ending Sept30th.
That means that about 25% of the funds distributions must have come from other sources.
What is even more disturbing is the fact that when compared to the same quarter a year ago, PHK has earned about 21.5% LESS in Net Investment Income on a portfolio that was LARGER by about 9.25% !!
So look at it this way, the fund earns much less on more assets ..makes me smile ;)
What we see is that the fund earned income of roughly 7.2% on an ANNUALIZED basis in the 3rd Qtr 2012 vs. about 10% ANNUALIZED in the 3rd QTR. of 2011.
The fund pays $1.4625 a year in distributions (or roughly $179Miil based on the Sept. 30 share count.
When I annualize the net investment Income figure from the 3rd Qtr. I get about $94.7 mil - that means that on that basis the fund MUST make up a difference of about $84.3mil from derivative bets - that is a HUGE number.
Now the fund has been doing GREAT on an NAV basis this year which probably enabled it to use capital gains (realized or not) to fill the gap of its Net Investment Income shortfall.
BUT, as we saw in 2011, derivative bets can be and are very risky and if/when the fund will be on the losing end (like it was during 2011) - those earnings will evaporate and turn to steep losses which would make a dividend cut all the more urgent.
For now, with the premium back to 35%+, I have been HAPPY to short again (prices of 11.20-11.60) 25% of the quantity I covered BELOW $10 just some 2 weeks ago.
I am long several other closed end funds that are trading at discounts and ARE earning their full distribution rates, as a mean to lessen the carry trade and hedge this short.
Over the past 12-18-24-30 months this pair trading has proven itself quite nicely and while the slam-dunk is still in the future (when PHK WILL crash to below its NAV) .
On another note, the Wall Street journal just featured PHK as an example for a bad trade in the high premium closed end fund arena.
In an article published today after the markets closed (for the weekend edition, probably), "The Great Yield Gamble",
The WSJ reviews how small investors have been chasing yield into all the wrong places and gives better alternatives to those mistakes.
here is what WSJ writes about High-Premium Closed End Funds with PHK serving (as usual) as a poster boy for that crowd:
Risky move: buying closed-end funds that trade at a premium.
Better idea: buying ones that trade at a discount.
Yield-starved investors are flocking to closed-end mutual funds, which have a fixed number of shares and trade on exchanges like stocks. That is because most of them use borrowed money, or leverage, to juice their yields as high as 20%, according to Morningstar.
Closed-end funds rarely trade at the value of their assets. Usually, they change hands at a discount-but these days, 250 of 381 fixed-income funds command a premium, says Cara Esser, a closed-end fund analyst at Morningstar. When a fund trades at a premium, the risk of losses rises.
For example, the Pimco High Income Fund has suffered losses of 14% during the past three months, even though its "net asset value," or the value of the assets in its portfolio, rose by 8.3% during the period, according to Morningstar. The reason: Its premium had shot up to about 70%, then plunged to 39% as investors concluded the fund was overvalued and bolted.
A safer strategy: Look for funds with lower yields that trade at a discount, Ms. Esser says. In general, stock funds are trading at lower premiums than bond funds, but still are throwing off decent yields. "
Disclosure: I am short PHK.