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George Spritzer, CFA
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George Spritzer, CFA is a registered investment advisor at Southland Investments and specializes in managing closed-end funds for individuals. George uses the following investment strategies:1) Opportunistic Closed-end fund investing: Buy CEFs at larger than normal discounts to NAV and sell them... More
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  • Pimco Dynamic Income Fund: A Flexible Fixed Income CEF With Recent Insider Buys By Dan Ivascyn 4 comments
    Jul 18, 2013 1:43 PM | about stocks: PDI

    Over the past two months, there has been a CEF "swoon" where discounts of nearly all fixed income funds have widened dramatically. The main cause of the "swoon" was an increase in the US 10 year bond yield from 1.63% in early May to as high as 2.76% in late June (today's close was 2.48%).

    The interest rate rise adversely affected the NAV's of fixed income CEFs, especially those with longer duration. But the selloff affected all fixed income CEFs, even those with low duration or even negative duration because discounts to NAV widened dramatically. There were also retail outflows from open-end funds that may have forced some of the fund managers to sell bonds from their portfolio regardless of their views.

    One fund that has been hit hard recently is the Pimco Dynamic Income Fund (NYSE:PDI). PDI is a taxable global multi-sector fund with a flexible mandate- it is pretty much a "go anywhere" fund. The lead manager is Dan Ivascyn.

    The fund has a fairly low duration and hedges much of its interest rate risk with pay-fixed interest rate swaps. These swaps allow PDI to receive floating rate payments and are similar to a short position in bonds- they help to hedge the portfolio against higher interest rates.

    Here are two recent insider buys by Dan Ivascyn, who now personally owns 370,443 shares of PDI with a market value of $10.6 million. Mr. Ivascyn definitely eats his own cooking!

    Transaction Date

    Number of Shares

    Price

    July 9, 2013

    35,997

    27.5309

    July 16, 2013

    30,000

    28.1942

    PDI Investment Breakdown (as of June 30, 2013)

    Mortgages

    122%

    Non-US Developed

    25%

    High Yield

    16%

    Investment Grade Corporate

    6%

    Emerging Markets

    5%

    Other

    2%

    Government Related

    -9%

    Net Cash & Equivalent

    -67%

    Ticker: PDI Pimco Dynamic Income Fund Pays: monthly

    • Total Assets= 2634 MM Total Common assets: 1378 MM
    • Annual Distribution (Market) Rate= 7.49%
    • Earnings Yield= 11.8%
    • UNII= 0.4513
    • Last Monthly Distribution= $0.177 (Annual= $2.124)
    • Monthly Earnings= $0.2829
    • Fund Expense ratio= 2.04%
    • Current Discount to NAV= -5.72%
    • 1 Year Average Discount to NAV= -0.73%
    • Portfolio Turnover rate= 16%
    • Weighted Average Credit Rating= BBB
    • Weighted Average Duration= 4.75 years
    • Effective Leverage: 47% (mainly reverse repos)

    Overall, I agree with Mr. Ivascyn and believe that PDI is a worthwhile purchase at current levels, especially in a tax deferred retirement account. It will likely throw off an attractive income flow for many years to come. It has been easily over-earning its distributions and has a large UNII, so PDI will likely pay out large year-end distributions at the end of this year.

    Disclosure: I am long PDI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: PDI
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Comments (4)
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  • 7of9
    , contributor
    Comments (456) | Send Message
     
    Thanks for an update on insider purchase. Does Dan own his other CEFs such as PKO, PCM, PGP, and RCS? How much ownership does he have in them?

     

    I looked at the interest rate swaps. They look like they hedge against 3 month libor rising not rise in long term rate we just experienced after the taper talk. Am I missing something?
    18 Jul 2013, 11:15 PM Reply Like
  • George Spritzer, CFA
    , contributor
    Comments (1104) | Send Message
     
    Author’s reply » The economics of a fixed-pay interest rate swap is somewhat similar to a short-position in long term bonds. If long term rates rise, the fixed payment does not go up, but the floating rate payments received can rise. Ivascyn has several of these with different time periods.
    19 Jul 2013, 11:58 AM Reply Like
  • Scooter-Pop
    , contributor
    Comments (4010) | Send Message
     
    Just bought in George, THANKS!!
    19 Jul 2013, 12:42 PM Reply Like
  • George Spritzer, CFA
    , contributor
    Comments (1104) | Send Message
     
    Author’s reply » Today the NAV for PDI was up three cents, but the market price fell 71 cents. Good buying opportunity tomorrow morning?
    24 Jul 2013, 06:43 PM Reply Like
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