Bill Gross is probably the best-known bond fund manager in the world. He is known by many as the "Bond King." Mr. Gross co-founded PIMCO, one of the top bond asset management shops. This morning's announcement that he would be leaving PIMCO to join Janus (NYSE:JNS) is sending shock waves through the market. These shock waves are particularly noticeable in the bond closed end funds that Mr. Gross managed. The CEFs managed by Mr. Gross often traded at significant premiums to net asset value due in large part to his involvement. Also, Mr. Gross often had significant holdings in the funds he managed.
Mr. Gross is the named manager on five funds all of which were trading lower as of 11:30AM EST on 9/26 the day of the announcement:
- PIMCO Corporate & Income Opps (NYSE:PTY) down -6.25%.
- PIMCO Corporate & Income Strategy (NYSE:PCN) down -3.83%.
- PIMCO High Income Fund (NYSE:PHK) down -8.59%.
- PIMCO Income Strategy Fund (NYSE:PFL) down -3.98%.
- PIMCO Income Strategy Fund II (NYSE:PFN) down -2.91%
The graphic below lists several metrics that can help quickly evaluate closed-end funds including distribution, leverage, premium/discount, 52-week average premium/discount, 1 Year Z-Statistic (from Morningstar), historic returns, and fund expense ratios. Data for the iShares Core US Aggregate Bond ETF (NYSEARCA:AGG) and the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG) are also included to provide ETFs to evaluate performance.
All of the PIMCO funds that were managed by Mr. Gross have shown strong relative performance. The funds use a decent amount of leverage but that has been beneficial to the performance over the time periods reviewed. The funds offer significantly larger distributions than the ETF alternatives. The expense ratios are manageable, particularly for leveraged closed end funds.
PHK is the fund that appears most at risk due to the large premium to NAV. PHK closed 9/25/2014 at a 46.13% premium to NAV. The premium had been shrinking before the announcement due to concerns about high yield bond spreads. The discount was below the 52 week average of 51.13% and today's move will likely shrink the discount further. This fund has shown very strong performance and has a distribution above 11% both of which have helped drive premium. However, I am always hesitant to purchase a fund trading at a premium as unexpected events can drive the premium lower as we have seen today. PHK could continue to sell off as even after today's move PHK still trades at a significant premium.
PTY is another fund that has traded at a high premium. While not as steep a premium as PHK the 17% premium is concerning and today's move likely will not move the fund to a discount. The strong performance, high distribution, and relatively low expense ratio are all attractive. However, some of the other funds have similar characteristics and trade at lower premiums or even discounts reducing PTY's attractiveness at current levels. PTY may well lose its premium, which could lead to significant losses for investors.
PCN, PFL, and PFN were all trading relatively close to NAV before today's news. These funds all offer high distributions and have shown strong performance. Today's moves may open up some interesting opportunities in the funds. It will be very important to see what the new management structure is for PIMCO overall and for these funds individually. PIMCO has a very deep bench of very talented bond managers. If the drama calms down and strong management remains, these funds could be interesting investments for opportunistic investors.
Today's news that Mr. Gross is leaving PIMCO is the second major management change at the firm this year. Investors are rightfully concerned about the changes at PIMCO and might be wise to wait and see how things shake out at the firm. PIMCO has a deep bench of very talented bond managers. If key managers like Daniel Ivascyn can be persuaded to stay strong performance may well continue. Investors in PHK and PTY may be wise to get out due to the high premiums these funds trade at. Investors in other PIMCO funds may want to take a wait and see approach, as there are many other strong managers at PIMCO that may continue to drive outperformance at these funds. Investors that don't have a stake in any of these funds may want to wait on the sidelines until the dust settles. However, investors could look for opportunities to enter CEFs if wide discounts open up due to recent news.
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