Main Thesis
The purpose of this article is to evaluate the PIMCO Municipal Income Fund III (NYSE:PMX) as an investment option at its current market price. This is a fund that has struggled in 2020, as it has not quite made up for the Q1 sell-off. This was driven by an overreaction earlier in the year for munis as a whole, which punished leveraged funds especially hard. Looking ahead to the new year, I see muni bonds as offering a reasonable value at the moment, but would caution investors to be selective on new positions. With this in mind, I have a neutral look on PMX. In fairness, the fund will start the new year with a much lower premium to NAV than it did at the start of this year. At just under 4%, this compares favorably to the 9% premium back in January. However, a premium price of any level in this environment should give investors pause. While not terribly high, there are other muni options from PIMCO, and especially from other asset managers, that trade at cheaper valuations. Further, PMX did see an income cut at the beginning of the year, which is likely a reason for its slow turnaround. Fortunately, the fund's income metrics have been strong since then, so it seems to have turned a page. Finally, the muni bonds have been resilient, with robust demand and few downgrades. However, investors should recognize more downgrades and/or defaults are likely if the pandemic gets worse heading in to the winter season.
Background
First, a little about PMX. It is a closed-end fund with a primary objective "to seek current income exempt from federal income tax." Currently, the fund trades at $11.82/share and pays a monthly distribution of $.046/share, which translates to an annual yield of 4.68%. I covered PMX at the beginning
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