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PCN: Another Strong Performer With A Persistent Premium


  • PCN continues to deliver strong returns, coupled with an improving macro picture and the persistence of a high premium to NAV.
  • Credit risk is not my primary concern for the high-yield sector, considering all the new cash that was raised under very low interest rates. However, duration risk is a key concern.
  • The fund's income metrics are not very encouraging. Further, the availability of cheaper options from PIMCO makes this one hard to justify at current valuations.
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Main Thesis

The purpose of this article is to evaluate the PIMCO Corporate & Income Strategy Fund (NYSE:PCN) as an investment option. This is a fund I was cautious on last summer, but continued to rise despite my expectations. Looking ahead, there is a chance this bullish momentum could continue. As the macro-economic picture keeps improving, PCN may still attract investors for a "risk-on" play.

However, I continue to have concerns about new entry points. While PCN has proved it is able to sustain a very high premium over time, that does not mean this will always be the case. Its current level is beyond my comfort zone, regardless of its individual trading history. Further, the fund's income metrics are not very strong, which is always a sore point for me. Finally, the rise in longer-term yields is pressuring the fixed-income sector as a whole, and PCN is not immune to this risk.


First, a little about PCN. It is a closed-end fund with a primary objective "to seek high current income, with a secondary objective of capital preservation and appreciation." Currently, the fund is trading at $17.23/share and pays a monthly distribution of $.1125/share, yielding 7.85% annually. PCN is a fund I am often reluctant to recommend because of the high premium that it often trades at. In fairness, the persistence of this premium makes my reluctance seem overly cautious, as investors seem willing to pay up for this CEF. In fact, my caution last summer would not have been rewarded, as PCN has seen strong gains since that review:

Source: Seeking Alpha

Importantly, once we consider distributions, PCN has seen a 13-14% return in just over six months. With this in mind, I thought another look at the fund was timely. However, despite this bullish momentum, I am still turned off by the expensive buy-in

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This article was written by

Dividend Seeker profile picture

Dividend Seeker began his career in financial services in 2008, at the height of the market crash. This experience shaped his investment strategy. He has worked in the Insurance industry in funds management, as a junior equity and currency analyst, and is currently working for one of the largest banks in the world.

He is a contributing author for the investing group CEF/ETF Income Laboratory where he specializes in macro analysis. Features of CEF/ETF Income Laboratory include: managed income portfolios (targeting safe and reliable ~8% yields) making use of high-yield opportunities in the CEF and ETF fund space. These are geared toward both active and passive investors of all experience levels. The vast majority of holdings are also monthly-payers, for faster compounding and steady income streams. Other features include 24/7 chat, and trade alerts. Learn more.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (14)

Does anyone have a solid understanding of PCN or PCM as to risk from the FED taper process? These both hold some 10-20% non-agency mortgage positions.

Or - is duration at 6.5% with rising interest rate risk the biggest worry?

Dividend Seeker profile picture
It is certainly a risk, but I believe the Fed purchased substantially more agency than non-agency MBS. So the high yield/non-agency market should be less impacted from the Fed reducing asset purchases. Further, duration levels in high yield are typically lower.

That said, it will still have an impact. Having less Fed support and a lower duration does not mean funds like PCN that hold those assets won't feel any pain. The hope is that more positive economic news balances this out - as that is most critical to the HY sector in that it reduces credit risk. But if conditions on the ground stay clouded and the Fed begins to taper, that would be a difficult scenario.
Premiums are paid on pimco CEF’s because of the great management they have. But I often wonder how they keep ahead and make money for their investors. I see tons of interest rate swaps in their holdings and ask myself “how are they always on the right side?” I like the fact that they have some funds around 20 years in age (pcm,pcn,pty) that have a total investment return in the same range as the s&p500. That’s amazing to me.
Dividend Seeker profile picture
Great point to bring up, and it is certainly true that the premium can be attributed to the fact that it is a PIMCO fund. I simply caution investors when premiums get too high - whether in absolute, relative, or isolated terms. That said, what is "too high" is also subjective.
Life On Mars profile picture
A lesson I learned long ago: NEVER UNDERESTIMATE PIMCO.
Sorry, I meant PCI and PTY
Very good analysis. I have owned PCN since 2010 so I have a good profit obviously but also concerned about the premium. Thinking about selling and looking more to Nuveen and Hancock taxable CEFs. I believe PTI and PYI are also at substatial premiums. Any suggestions?
Dividend Seeker profile picture
Those are two funds that I have often viewed favorably over the long term. I am reluctant to pay high premiums right now...fixed-income faces a massive headwind if yields keep rising, and then rates follow suit (as we have seen the last few weeks). I don't want to compound this risk by buying funds with large premiums. That is just my personal preference, but I am more conservative.

That said, these options, such as PCN and others, do have a more limited duration than many "safer" options. So I would lean towards these diversified products over AGG or LQD. Otherwise, I'd stick with selective stock buying.
Bought PCN last year to replace a couple bonds that were called in the IRA. The current elevated premium is a bit daunting for me now too.

Thank you for the PCN report, Dividend Seeker.

Retired income investor
Dividend Seeker profile picture
Sounds like you got in at a good time, I'm glad you liked the review. Stay well!
Seatonmanagement profile picture
I passed on PCN some time back, PCI & PTY instead.
Nice write-up
Dividend Seeker profile picture
Thank you, and hopefully those funds have worked out well for you
rickevantodd profile picture
Excellent article.
Dividend Seeker profile picture
I always appreciate it
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