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  • TOTAL RETURN DESTRUCTION BY PREMIUM - The PHK TEST CASE! 0 comments
    Dec 12, 2012 7:45 PM | about stocks: PHK, JNK, FHY, ERC, JQC, NAD, NXK

    Since PHK zoomed to unrealistic (as well as un-sustainable premiums) some 3 years ago , the choir on the Yahoo Message Board, as well as a few members here on Seeking Alpha, has insisted PHK is a great investment.
    This has been a MYTH over the past 3 years and can clearly be shown by looking at comparable total returns of alternative funds across several different asset classes (not just within the HY arena).
    Below are a few data points of total return performance - I even included JNK which is not using ANY leverage to drive the point home.
    The after tax performance of ALL CEF's mentioned below is even BETTER vs. PHK's because a big part of their total return has been by capital appreciation which is subject to a MUCH LOWER tax rate than the ordinary income the PHK distributions are subject to (no capital appreciation for PHK over the past 3 years - again, it's the PREMIUM to NAV!).
    To add insult to injury take a look at the total returns of TAX FREE muni bond CEF's over the same time frames.
    We are talkig TAX FREE INCOME here (worth perhaps 65% to 70% more than taxable income to people at high tax brackets) - with some capital appreciation as well.
    Drum roll please....:

    1 YEAR :
    PHK + 4.67%
    JNK + 15.60 % - UN-LEVERAGED HY ETF!
    FHY + 24.17% - Leveraged HY fund that pays what it earns and was at a nice discount 3 years ago.
    JQC +35.16% - MUCH more conservative portfolio with hardly any duration risk vs. PHK!
    ERC + 18.79% - Diversified bond fund with about HALF the volatility of PHK!
    NAD +21.31% - National TAX FREE CEF, yes TAX FREEINCOME + capital appreciation.
    NXK +17.51% - NY RAX FREE CEF, yes, TRIPLE TAX FREE INCOME for NY residents!

    18 months:
    PHK +8.12%
    JNK +15.68%
    FHY +24.60%
    JQC +24.29%
    ERC +16.71%
    NAD +36.30%
    NXK +29.75%

    2 YEARS:
    PHK +13.54%
    JNK +20.77%
    FHY +46.15%
    JQC +35.57%
    ERC +24.15%
    NAD +42.58%
    NXK +37%

    30 months:
    PHK +32.63%
    JNK +34.51% (no leverage here, remember?)
    FHY +61.32%
    JQC +58.11%
    ERC +35.51%
    NAD +37.36%
    NXK +31.68% (seems like in line with PHK right? Now try and figure out what was the AFTER TAX return on both funds!)

    3 YEARS:
    PHK 40.96%
    JNK +37.60%
    FHY +68.98%
    JQC +75.22%
    ERC +42.67%
    NAD +48.83% (TAX FREE INCOME)
    NXK _43.05% (TAX FREE INCOME)

    Now, why would a fund that pays such a high distribution LAG so badly other CEF's from all different sectors, all the while being managed by such a hot shot manager?
    Drum roll again please.......:
    IT"S THE PREMIUM!!!

    Disclosure: I am short PHK.

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