Seeking Alpha

NYer1's  Instablog

NYer1
Send Message
x
  • PHK: Is My Closed-End Fund Dividend Safe? Morningstar says NO..I agree! 1 comment
    Aug 4, 2011 8:29 PM | about stocks: PHK
    On July 22, Morningstar came up with an article asking the question:
    Is My Closed-End Fund Dividend Safe?
    http://news.morningstar.com/articlenet/HtmlTemplate/PrintArticle.htm?time=19223606

    Over the past few months I have discussed here the case for PHK's exuberant premium to its NAV and while the premium stays very high and Grossly inflated (pun intended), PHK's "real total return" - (defined as NAV return + Distributions) has lagged its peers.
    Looking at the past 3 months from May 4th to August 4th one case see that the real total return for the fund has been a NEGATIVE 4.05%!!
    Bearing in mind that Morningstar's analysis shows that just 8% of PHK's holdings pay coupons that can support it's core yield :

    "Let's take a look at the two funds mentioned above. Neuberger Berman High Yield Strategies has over 200 securities in its portfolio, with over 72% of its assets in the top 100 holdings. We estimate that over 67% of its holdings offer coupon rates (yield) above the fund's new "core yield," which we explain below. Meanwhile, PIMCO High Income has over 325 holdings in its portfolio, but it is far more concentrated, with 89% of its assets in the top 100 holdings. Furthermore, we estimate that only 8% of its holdings offer coupon rates above its core yield. What's going on? "

    What IS going on indeed?

    I am of the opinion that at a time of dismal real returns (remember, NAV+distributions), the fund would be very hard pressed to keep paying its lofty distribution rate of  16.7% on its NAV without returning capital to investors.

    That stable monthly distribution of 0.121875/share was set up when the fund was issued back in April 2003 and was realistic back then given the prevailing interest rates and spreads between junk bonds and treasuries.
    The reality in today's markets is such that paying 16% on NAV is impossible without partaking in VERY risky strategies AND leverage.
    This has been very rewarding to PHK's owners until this year but as we all know, no money manager is foolproof to mistakes and no run can last forever.
    See discussion here about Bill Miller's fall from grace after his 15 year run beating the S&P 500 until 2006:
    http://www.fiercefinance.com/story/bill-miller-lags-index-again-2011/2011-08-01

    As an ancdote, Bill Gross' flagship fund, the Pimco total Return Fund (MUTF:PTTAX) has been lagging its peers over the past year and lagging sorely:
    the fund's total return is in the 59th percentile over the past 12 months, and 82-90th percentile over the past week, month, 3 months and year to date.
    http://performance.morningstar.com/fund/performance-return.action?t=PTTAX&region=USA&culture=en-us
    Given the fact Mr. Gross is overseeing the management of both funds, one should not be surprised to see similar strategies of hedging and leveraging and positioning .

    Are we witnessing the end of an era of outperformance by Bill Gross, his Pimco Total Return fund and perchance PHK as well?
     I wouldn't be surprised.


    It seems that PHK's management has bet the house using very high leverage of futures contracts and other "cheap money" instruments to inflate the portfolio with assets and bet on market directions of Treasuries and Currencies (Wrong so far).
    Please see the discussion on different kinds of leverage in the Morningstar article:
    http://news.morningstar.com/articlenet/HtmlTemplate/PrintArticle.htm?time=19223606

    A look at PHK's NAV tells us very clearly that up to March of 2011 the fund was able to increase its NAV while supporting its distribution rate.
    However, a clear trend has been in the works since then showing PHK's NAV trending lower with acceleration in this downtrend since end of May 2011.
    And over the past 3 months the fund has actually LOST 4.05% after taking into account its distributions.

    Triggering a negative trade bias on the fund was a cross of the 12 week NAV moving average around the week of May 20th and when the NAV was not able to cross back up during the week of May 27th the jig was up!

    Notice that the 12 week moving average has served as a pretty nice support level over the past year and has now become first resistance level.

    The confirmation point for me was around early July when the NAV's 50 day Moving Average crossed its 200 day Moving Average to form a classical "death cross".
    As specified in a previous post, this cross has been a very significant omen for negative price action in PHK's past - last time it happened was in July of 2007 with disastrous consequences, foretelling the financial crisis and total collapse of NAV which almost made the fund to liquidate its portfolio to save itself from total ruin (due to its high leverage).

    Barring unforeseen circumstances and given my bearish outlook on the "risk trade" in general - I expect PHK to come up with a series of Section 19 notices in coming months which disclose that part of its distribution is derived from return of capital (NYSE:ROC).

    When we examine the latest release by Allianz regarding closed End Funds earnings (June 2011) - one can easily see that PHK has no reserves at all to pay any shortfall from its earnings in order to cover the stable distribution on a monthly basis.
    Matter of fact, PHK had a NEGATIVE UNII as of the end of June 2011 of about 8 cents a share - which means PHK OVER DISTRIBUTED about 8.2 cents a share over what it earned as of the end of the second quarter.
    http://www.allianzinvestors.com/ClosedEndFund/External%20Documents/cef_earnings_leverage_data.pdf

    That is a very bad scenario for PHK owners as they would be getting a return of capital at NAV prices for shares they see at premiums of well over 40% to NAV.
    It will also signal a precursor to an eventual dividend reduction as the fund management would relaize it has been using too much leverage and risk to try and garner that 16% distribution from the funds assets.

    For the next few weeks months, I still expect PHk to lag its peers on a significant basis and for the premium to shrink significantly as "risk trade" and momentum players abandon this ship realizing this trade has played its course.

    As a final note this evening, PHK shows an extremely high Standard deviation over the past 3 years that makes this fund a VERY risky alternative to peers in the high yield arena.
    Some of those peers are paying a much more reasonable distribution on their NAV's and are only 1-2% lower in distribution from PHK's while trading at DISCOUNTS to their NAV's (or a slight premium).

    Longing those peers while shorting PHK might be a suitable strategy for those of you that are comfortable with the risks involved and the intricacies of "pair trading".

Back To NYer1's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (1)
Track new comments
  • Cautious_Bob
    , contributor
    Comments (16) | Send Message
     
    Good luck, many have tried to short PHK month after month, it could happen some day but I'm not sure how long you will have to wait for the market price to return to NAV.

     

    It could happen next week or 3 years from now who knows.

     

    You gets points though for working the story and trying to spread the news about it.
    9 Sep 2011, 09:42 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

  • $UPS down big.It will adjust its pricing going forward AMZN will suffer from this with higher shipping charges during peak shipping periods
    Jan 23, 2015
  • $JGH # of Shares Tendered 18,712,933 Number of Tendered Shares to be Purchased 8,025,798 Pro-Ration Factor 42.89% Purchase Price $19.1019
    Jan 16, 2015
  • $JGH Nuveen announced some 57.1% submitted tender requests. http://bit.ly/1BZFFvT
    Jan 12, 2015
More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.