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PIMCO High Income Fund: Substantially Overvalued?

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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.

PIMCO High Income Fund: Look to Swap Out

I don't get the math. If I had a fund that has $1 billion in assets at a yield of 14% and leveraged it 33% at cost of 6%, my equity yield would be 16.6% excluding fees. If investors were to bid up the stock to a 50% premium of the original equity value (NAV), my equity yield would drop to 9.3%--not go up.

Isn't a significant premium anticipatory; thereby implying significantly higher positive future events? While the fund could certainly buy higher yielding assets than the market rate because of market expertise, this type of premium is hard to justify.

What am I missing? I would appreciate some insight.