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  • PHK report card for 2011 - VERY POOR performance and more of the same in 2012! 1 comment
    Jan 1, 2012 6:37 PM | about stocks: PHK, ROC, JNK, FHY, EAD
    Well folks, now that the year is over, we can take a look at how did PHK  owners have done for the past year and compare that to other alternatives.
    While PHK did amazingly well coming out from the brink of the abyss during the financial crisis of 2008-2009 - once financial markets stabilized more or less and the banks and insurance company papers PHK is very over-weighted in recovered to near par valuations (or sometimes even above par) - there was no way PHK could replicate the results it has shown in 2009 or even 2010.
    Bill Gross and his team mismanaged the fund to such an extent that PHK clocked in as the WORST performing fund among its peers (based on NAV performance - which gives us the true measure of the management team's performance)- placing it at the 100th PERCENTILE for the year, the past 9 months, 6 months and 3 months.
    Not a great reason to own this fund if you hang on to the notion the premium is warranted due to the management team's superior skills.
    While the fund still sports one of the best 3 years returns (due to an amazing 2009) this record was achieved as a one time event due to the fund's (and the whole leveraged financial sector) miraculous recovery from the brink of insolvency and liquidation.
    It is quite safe to assume that what we had seen in 2009 will not be replicated in our lifetime or at least any time soon.
    The more logical assumption is that we are back to normalcy (more or less) and for PHK to be back to where it always was - a mediocre fund ranked mostly below the middle of the pack of its peers - 2011 has proven that the principle of reversion to the mean is still alive and kicking!
    When markets stabilized it was obvious for Gross and Co. that the fund can not earn its outlandish distribution rate (currently over 20% on the funds assets) and they resorted to betting on some macro economic leveraged instruments like futures and swaps on Treasuries, Currencies and selling Credit Default Swaps on credits.
    That proved quite disastrous for the fund as NAV erosion can attest to over the past 12-15 months.
    It was just a question of time till the fund would be forced to resort to returning capital to its shareholders in order to maintain its distribution rates - and indeed the first harbinger occured 3 months ago : seekingalpha.com/instablog/478319-nyer1/...; - since then another ROC has occurred making it the second time in 3 months the fund was forced to return capital to shareholders.
    While the rate of ROC is not very great so far (it is not insignificant either..), it gives us a clue as to the real earning power of the fund's assets these days which is roughly 8.5-9 cents per share per months - much more in line with its peers.
    While the year provided a positive return to PHK holders on a market price total return performance basis - it was still a much weaker performance than the vast majority of its peers gave their shareholders.
    A big part of the reason is the huge premium that although has refused to abate so far, proved to be a drag on relative performance nonetheless.

    As promised here is some relative performance figures which clearly illustrate that PHK has sorely under performed its peers during 2012.
    As discussed above, I believe the culprits are 2 :
    a) Mismanagement by the Gross and Co. team and
    b) Outlandish premium to NAV which has caused the fund to lag its peers (and will continue to drag performance down in the future)

    And the numbers are...(drum roll):
    PHK market price total return (including re-investment of distributions at pay date) was +5.76% in 2012 - on the face of it, not a bad performance considering equity markets did close to nothing.
    HOWEVER let us see what a number of its peers achieved in total return in 2011 (market price total return wise):
    FHY - +21.58%
    HHY - +20.65%
    EAD - +17.02%
    CYE - +14.29%
    HIX - +14.06%
    CIK - +11.02%
    NHS - +10.75%
    HYV - +10.73%
    DHY - +10.59%
    DSU - +10.39%
    CIF - +9.81%
    EHI - +7.19%

    The average total return (market prices) for those 12 funds above was about +13.17% for 2011 vs. just +5.76% for PHK - an average out-performance of some 7.41%!! by a portfolio of 12 funds with much lower volatility and risk than PHK.

    And then there are quite a few more with returns higher than PHK (I thought a dozen fund should be sufficient to illustrate the point)

    The picture gets much uglier for PHK when we examine its NAV performance which serves as a proxy to the management team's performance this year :
    PHK finished the year with a negative total return on its NAV of about -5.4%!!

    This in a year when an Unleveraged and Unmanaged HY ETF like JNK returned about +3%.

    Now, let us see what other HY closed end funds managed to gain in total return on their NAV's during 2011 (numbers are good for 12/29/11 but there were no meaningful changes in the last day of the year):
    FHY : +11.90%
    EAD: +7.00%
    HHY: +5.68%
    CIF: +5.35%
    DHY: +5.09%
    CIK: +4.95%
    DSU: +4.29%
    CYE: +3.27%
    HYV: +3.19%
    NHS: +2.69%
    EHI: +2.46%
    HIX: +1.55%

    The average total return based on NAV performance for the 12 funds above was +4.785% vs. a NEGATIVE total return on PHK's NAV of -5.4%.
    That means that again, a portfolio of 12 diversified funds with much less risk and volatility had out-performed PHK based on NAV total return by some 10.185% in 2011!

    As you can see, the numbers are significant and clearly show that PHK's management team have managed the fund quite badly in 2011- a year that had much more common characteristics in the HY markets than 2009 when PHK blew the competition away (but as we know, will probably be considered an anomaly and a once in a lifetime event for us all).
    Bottom line for all you PHK diehard believers and Bill Gross cultists: Your fund has badly underperformed its benchmark and its peers while carrying a risk profile that is much higher in risk than any of its competitors.
    Not only did the risk not pay off, it proved detrimental to the fund's performance.
    In addition to that, the fund had to resort to Return of Capital (NYSE:ROC) and 2 of the last 3 distributions included not insignificant amounts of ROC so that the fund maintain its unrealistic distribution rate.
    That too has been a negative event to shareholders as they got back cash valued at 100% of NAV while holding PHK at premiums of 65-70% over NAV.

    My outlook for 2012 - more of the same under performance by PHK with further NAV erosion and/or under performance vs. peers as the fund will not be able to make over 20% on its assets to pay for its unrealistic distribution rate and will have to continue with ROC to supplement its earned income.
    I believe it is just a question of time before the fund's management team realizes this distribution rate is not sustainable and will cut it to something like 8-9 Cents per share per month- more in line with market conditions.

    That of course will cause a collapse in market price to where the fund's valuation really belongs : below its NAV (or slightly higher).

    Happy New Year to everyone.








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  • outcastsearcher
    , contributor
    Comments (1370) | Send Message
     
    Nice article. As a seller of JNK OTM Put options, trying to get a "rational" HY ETF at a reasonable price, I am simply astounded at the phenomenal premium PHK commands -- once I confirmed that ROC is what helps sustain the high dividend.

     

    The only thing I can conclude is that a lot of investors don't bother to do much research or independent thinking when buying such funds.

     

    Sad how outfits like PIMCO and their peers can utilize their high fees to generate (via marketing) -- MORE high fees, despite lacklustre long term performance, made terrible considering the fees.

     

    OTOH, considering what people vote for (aka the "wonderful" U.S. Capitol hill gang -- I guess I should quit being optimistic about the collective public's intelligence.
    16 Feb 2012, 11:11 PM Reply Like
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