We continue our series of articles on closed-end fund monthly outlooks. Here we look at the PIMCO Dynamic Income Fund (NYSE:PDI) - another fixed income fund from the PIMCO CEF stable. The fund is allocated mostly to mortgage-backed securities with the rest split among US high-yield credit and emerging and developed market bonds.
In a nutshell, we reiterate our macro view that the intermediate-term environment is broadly supportive of MBS given the lower expected prepayments and falling supply. That bullish factor is somewhat mitigated by our expectation of an upturn in market volatility and policy uncertainty of the new administration. As far as the fund itself, we have a market-weight position owing to the relatively high historic premium to NAV as well as negative seasonality for fixed-income CEFs in December. However, we would look to add risk on negative price action over the coming months.
Bird's Eye View
We kick off with our "R&D" chart which captures a high-level overview of the fund, showing net and gross returns as well as the premium/discount to NAV. We see that while the price of the fund has fallen, the gross returns have been fairly good. The discount-to-NAV of the fund has typically been negative but has rallied this year so that the fund is now relatively expensive at 4.7% premium at the end of November.
Asset Drivers of Performance
In order to get a macro picture of what drives the performance of the fund, we regress the fund NAV returns across the major asset classes. For PDI we find that high-yield credit, treasuries and mortgages have the largest t-stats. In the chart below we also include the Premium/Discount and the Residual of the regression.
The betas of the high yield and mortgage factors are positive (in the same direction), while the beta of the treasury factors is negative suggesting that the PDI NAV tends to increase as treasuries drop in price. This has to do with the relationship, among other things, between interest rates and mortgage prepayments.
Breaking down PDI returns over the previous month, all 3 components (treasuries, mortgages and high-yield credit) registered negative returns, but the positive regression-based impulse from treasuries largely offset the negative impulse from the other two factors.
Monthly Return Breakdown
Digging into the actual drivers of returns over the previous month, we see that the drop in NAV, fees and a decrease in the premium contributed small negative returns, which were almost offset by the dividend for the month (which in our calculation below we gross up by the fees).
On a gross basis, PDI was marginally down by 0.14% on the month. This is in contrast to a very strong performance this year of 11% and almost 19% over the last three quarters.
Volume and Price Action
We find interesting price action when looking at the monthly trading volume average. Particularly, the spikes in volume have tended to coincide with positive price action over the short or intermediate term. While the overall trend of PDI remains linked to the broad fundamentals of the economy and markets, tactical investors may find this useful in timing their entry into the fund or increases in existing positions.
While we don't put as much stock in seasonality indicators (especially for a fund with as little trading history as PDI), we don't discount it completely. Looking at average returns of PDI by month we find that December has been the weakest month. While we do not recommend selling on account of this signal we would add position on any weakness in the month.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.