Gruber

PIMCO High Income Fund: Substantially Overvalued?

While I may disagree with some of your points I think your analysis is as good as any professional opinion. I'd encourage you to keep at it.


On Jul 09 12:13 PM Jade Bond wrote:

> Joe said, "I’d appreciate any additional insight into why this stock
> is trading where it is."
>
> I'll take a stab at this. I'm not a professional analyst, but here's
> my confusion with Seeking Alpha's analysts and why I own PHK.
>
> PHK is a leveraged high-yield fund. Why must "high-yield" come from
> securities income generated by the fund's portfolio instead of the
> fund's trading activity?
>
> The securities in the fund might not be "earning" +20%, but the money
> I get out from the trading activity is earning me +20%. Why is that
> bad for me?
>
> Why are analysts analyzing it like a value play? (seekingalpha.com/artic...)
> I get the math about subtracting distributions from income, but the
> part about not earning and paying out the income from trading --
> well why shouldn't I expect that? When I buy/sell securities and
> generate income, I call that "earning". It's not the value-investing
> form of the word, but it's earnings from my activities, which is
> security trading. Isn't this what a hedge fund does? (See my interpretation
> below).
>
> Why is this analyst using only the historical premium as a gauge
> instead of the historical yield? seekingalpha.com/artic...
>
> "This is well in excess of its historical premium of 4%."
> and
> "Compare this with the metrics of three ETFs that invest in junk
> bonds"
>
> Aren't those other comparative securities getting their yield from
> the securities in the portfolio instead of their trading activities?
>
>
> In this piece, much more detailed and in depth, I still can't tell
> why the peer comparisons are valid. seekingalpha.com/artic....
> Do the 3 ARPS leveraged peers use the same strategies and portfolio
> mix as PHK? Are they yielding less because they aren't as successful
> at milking the system? Point 2 is moot if PHK generates it's yield
> from trading instead of investment income. Point 3 is moot if they
> adapt to the changing market by moving to more traditional securities.
> Point 4 is a valid concern. But on the flip side, if the worst is
> indeed behind us, NAV of PHK will indeed rise. Point 5 is true and
> valid. But my interpretation is they've changed because the world
> in which they operate has changed. Point 6: I quite buying, too.
> How much do the insiders already own, and why should they continuously
> keep buying more?
>
> My interpretation is that PHK has become a hedge-fund-type of investment
> for the retail investor to take advantage of the distorted market
> in MBS and CDO securities. For sure, that's a risky game to be in.
> But doesn't that argue for analyzing PHK as a hedge fund rather than
> a value or typical high-yield fund? Seems to me the correct analysis
> is to look at trading strategy, the market in which it trades, and
> the hedging/risk management of the strategy, not securities analysis
> ratios.
>
> What I gather from these three analysis is they expect PHK will revert
> to it's historical 12% yield by falling in value to match other high-yield
> funds producing 12% returns. My reason for owning it is the opposite
> -- I presume the yield will return to 12% as the management (currently
> Bill Gross himself) cycles the portfolio out of the old MBS/CDO instruments
> through trading activities into newer historical norm high-yield
> instruments, or as the holdings themselves rise in value (as the
> portfolio securities' internal cash-flows resume) from the shifting
> economic landscape.
>
> Granted, some who follow Elliot Wave Theory don't think we're done
> with the economic collapse, and others think these old toxic-waste
> debt instruments are going to live up to expectations of 75% defaults
> (or worse). But it's my belief that a) the worst is over in the global
> economy, and b) Bill Gross and company know how to pick the right
> MBS/CDOs.
>
> I sure hope my questions aren't treated as rhetorical. I still haven't
> read the classic book "Security Analysis", so I really would hope
> someone can address my misunderstanding on the particular questions.