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Erik Gholtoghian
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  • High Income Fund Showdown: JNK Versus NCV Versus PHK 8 comments
    Dec 15, 2011 12:41 AM | about stocks: JNK, NCV, PHK
    The economy is in an uncertain state, but one which appears to have some footing of some sort.  Europe, although unsteady, seems to have most of the fear factor eroding.
    US junk bond fund payments/dividends fell apart for years, but of late they have been holding up more steadily. 

    The SPDR Barclays Capital High Yield Bond ETF (NYSEARCA:JNK) for example has been holding steady with an average monthly dividend of roughly 24 cents for the prior six months, which translates to 7.92% per year at current prices.  The AGIC Convertible & Income Fund (NYSE:NCV) on the other hand is a closed-end fund which is offering 12.19% and a steady payment history of roughly nine cents per month.  The PIMCO High Income Fund (NYSE:PHK) is offering a monthly payment of 12 cents, which equals approximately 11.90% per year at these prices.

    The funds have their own unique advantages.  (JNK) offers options and the most liquidity.  It also offers quick transparency with the actual bond markets.  Meaning, when junk bonds fall in value, (JNK) falls in value nearly in lock-step.

    (NCV) offers a managed fund of mostly convertible bonds, with the goal of trying to earn even more income than junk bond funds by adding in leverage and some other management techniques.  The risk is that the monthly payments are set for long periods of time and are then rapidly hiked or in this environment cut.  The downside is this can trap investors who do not want to take principal risk.  The fund also nearly always trades at a premium to NAV (net asset value).  The current premium is 10.80%, which means the fund could someday fall to net asset value very easily, trapping investors further.

    (PHK)
    offers the same managed fund style as (NCV), but the big difference here is you are paying a much larger premium to net asset value.  The current premium to net asset value is a whopping 70%!  This can be looked at two ways.  Either the fund is in fact the best managed in the world, and the premium is justified by the superior management techniques, or you can look at this premium as a rip-off of 70%.  It does not happen often, but I have seen hedge funds try and knock down this fund's premium by shorting the shares, and at times they are effective.  But the Bill Gross managed fund continues to regain its composure every time it is knocked down.  The main reason the premium lives on is that the large monthly dividend of this fund is one of the only in existence with such standing power that it has not dropped its gigantic dividend payments even one time.  The fund has been known to employ unconventional fund techniques, such as being net short US treasury bonds.


    Conclusion:

    If you are looking for a liquid instrument for which you can accurately trade the high yield bond market, (JNK) is your choice.  Options give your positions tremendous flexibility as well.  If you are looking for a fund with a huge monthly dividend but only a small premium to (NYSE:NAV), (NCV) is your choice.  But beware that the huge dividend is more likely to be cut than many other funds if the market contracts too far.  (PHK) is the choice for those who want their money managed by the largest name brand in the business.  70% is truly an astonishingly high premium to pay, but something about having Bill Gross manage your bond portfolio in turbulent times does feel good. 

    An excellent idea is to diversify across all three funds to have the best of all of the fixed income world.  (JNK) puts can also serve as excellent insurance for all three funds losing principal.  (JNK) is shown below versus both (PHK) and (NCV).



    Disclosure: I am long JNK.

    Additional disclosure: My position is a synthetic option position.
    Themes: Bonds Stocks: JNK, NCV, PHK
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Comments (8)
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  • Erik Gholtoghian
    , contributor
    Comments (964) | Send Message
     
    Author’s reply » I believe PHK will hold its premium, although discretion should be used.
    22 Dec 2011, 12:33 PM Reply Like
  • NYer1
    , contributor
    Comments (743) | Send Message
     
    Hi Erik
    I wonder where did all my comments and your responses to this post disappear...
    I think the dialogue in the comments was much deeper than the post itself
    23 Dec 2011, 07:41 AM Reply Like
  • NYer1
    , contributor
    Comments (743) | Send Message
     
    Not very conductive to develop a reasoned and well thought out exchange of ideas Erik.
    Your choice of PHK as an alternative for JNK or NCV was poorly researched and reasoned.
    Your assertion that : "....something about having Bill Gross manage your bond portfolio in turbulent times does feel good. " does not hold water based on PHK's dismal performance for the past 12-15 months.
    See my Blogpost here: http://seekingalpha.co... - which shows how PHK had done in 2011 vs. a list of 12 other Closed End Funds in the HY arena - not a pretty picture to look at and certainly not a vote of confidence in Pimco or Mr. Gross' management skills.
    3 Jan 2012, 08:54 AM Reply Like
  • Erik Gholtoghian
    , contributor
    Comments (964) | Send Message
     
    Author’s reply » Well, LQD outperformed JNK. And TLT outperformed both. Do you think that means LQD is managed in a superior fashion? Less risky assets did better this year. PHK still outperformed JNK. So I wouldn't jump to the conclusions you have, although we are not in total disagreement about PHK. Again, you seem to think markets are much less efficient than statistical data suggests.
    5 Jan 2012, 09:31 PM Reply Like
  • NYer1
    , contributor
    Comments (743) | Send Message
     
    The problem is JNK OUTPERFORMED PHK and in a big way too ERIK.
    Check PHK's total return on its NAV vs. JNK's and you will see a significant difference.
    Matter of fact, PHK placed at the 100th Percentile in 2011 based on NAV performance.
    This is the true measure for management's performance and not the market price which was driven by Premium going higher and higher as NAV went lower and lower.
    Check out my report card for PHK vs. a group of 12 other HY closed end funds for 2011 and you will see why I do not agree with you that PHK at current premium valuation should be considered as an alternative before other funds in its arena.
    http://seekingalpha.co...
    5 Jan 2012, 11:31 PM Reply Like
  • outcastsearcher
    , contributor
    Comments (1370) | Send Message
     
    "(http://bit.ly/AruStS) puts can also serve as excellent insurance for all three funds losing principal."

     

    Or, one can embrace the risk, given that bond funds have less beta (generally) than stock funds, and that the high junk bond yield coupled with junk funds' typical short duration (generally well under 5 years in recent months), and SELL the puts, hoping to acquire some JNK at lower prices, and average down if the opportunity presents itself.

     

    FWIW, that's what I've done over the last year, and net, collected roughly the total option premium of about 5 points on a 40 point ETF for JNK over the past year -- while owning nary a share.

     

    It is currently looking like the "risk" to this strategy is I will end up owning no JNK as the price seems to want to run up (and I'm loathe to "chase" it once the yield gets to about 7%.)

     

    Fine -- I like to have a cash horde, or buy something like FCX when it really gets hammered hard.
    16 Feb 2012, 11:21 PM Reply Like
  • outcastsearcher
    , contributor
    Comments (1370) | Send Message
     
    Good for you Erik, BTW, by having the guts to stand up and report on the objective facts about the relative risk and underperformance of a much beloved PIMCO fund.

     

    It's odd how so many shareholders, apparently instead of appreciating the advice and info, want to tar and feather the messenger.

     

    Kind of reminds me of Ayn Rand describing in "Atlas Shrugged" how the person who invented (the ability to control) fire was likely thanked for their efforts by being burned alive...
    16 Feb 2012, 11:26 PM Reply Like
  • Erik Gholtoghian
    , contributor
    Comments (964) | Send Message
     
    Author’s reply » Good points. Overall, I think PHT is my favorite fund these days. A bit more yield than JNK, but safer than NCV or PHK.

     

    Junk bond yields are shrinking a bit.
    17 Feb 2012, 01:03 AM Reply Like
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