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  • Price action and NAV deterioration continue to point to a trend in premium erosion 0 comments
    Jul 15, 2011 5:56 PM | about stocks: PHK, CEF

    PHK has been quite weak since June 3, 2011 when Merril Lynch came out with its sell recommendation.
    I have written in the past about the expected reversion to the mean (NAV +- 5%) as well as about historical trends concerning the fund's NAV - please see my comments in the 2 posts below.
    In this post I would like to examine whether the recent weakness in both price and NAV distinguishes itself from other HY Closed End Funds or whether this is an industry wide phenomena.
    Upon examining the charts comparing PHK to 2 other Closed End funds - namely, EAD and HIX - we can come to the conclusion that indeed we might be witnessing the start of a trend  upon which PHK would offer its holders lower total retuns in comparison to other , more reasonably valued alternatives.
    Year to date, PHK's total return has been 8.96%.
    That compares unfavorably to the total returns of HIX and EAD at 14.17% and 12.06% respectively.
    PHK started the year at a premium of 39.67% over its NAV while HIX started the year at a discount of 1.47% and EAD started the year at a slight premium of 2.82%.
    Although PHK's market price continued to go higher and thus the premium continued to expand to 47.04% as of the close 7/14/11 - we see that its NAV actually has gone LOWER year to date to the tune of 1.65% vs. small increases to the NAV's of its two peers.
    The above mentioned phenomena is shown at even starker terms ever since the Merril Lynch report (and NAV premium record) of June 3 2011.
    Since then, PHK's total return has been a NEGATIVE 10.55% while HIX and EAD have shown a NEGATIVE 0.81% and 2.16% respectively.
    After close to a month and a half from the date of the report, it is quite reasonable to assume that some market participants have indeed grasped the dangers behind buying into (or holding) this fund at outrageous premiums to its NAV - despite the stable dividend distribution that entices many of the retail investors that are still clinging to it.
    I would posit that this trend of the past month and a half or so would continue to evolve until PHK would lose most (if not all and more) of its premium to NAV.
    Further erosion of NAV would eventually force fund managers to cut dividend rates as well, as those rates are not in line with current market conditions and the fund assets.

    Stocks: PHK, CEF
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