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High Income Fund Showdown: JNK Versus NCV Versus PHK

|Includes:SPDR Barclays Capital High Yield Bond ETF (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.
Stocks: JNK, NCV, PHK