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PIMCO Income Strategy Fund - Take Some Risk Off

Apr. 02, 2021 10:24 AM ETPIMCO Income Strategy Fund (PFL)PDO21 Comments
Gary Gambino profile picture
Gary Gambino


  • PFL is trading at a high premium to net asset value not seen in nearly 10 years.
  • High-yield bond spreads vs. Treasuries are approaching lows touched in 2007 and 2014 - historically bad entry points for PFL.
  • The fund is covering about 75% of distributions with investment income - doable if NAV is also increasing, but a problem if it is declining.
  • PDO is a newly-issued fund trading closer to NAV. It also invests in riskier fixed-income sectors, but has shorter average maturity and lower leverage.
  • I recently sold PFL and bought a smaller amount of PDO.

Ratings on bonds
Photo by Chunumunu/iStock via Getty Images


I last wrote about PIMCO Income Strategy Fund (NYSE:PFL) in December 2020. At that time I noted how this closed end fund has been a strong performer over the long term

This article was written by

Gary Gambino profile picture
I am a Chemical Engineer by training and have an MBA with concentrations in Finance and Operations Management. I retired early after 22 years in the energy industry with roles in engineering, planning, and financial analysis. I have managed my own portfolio since 1998 and have met my goal to match the S+P 500 return over the long term with lower volatility and higher income yield. I plan to focus my writing on positions I already hold or am considering changing, however my bias is toward long-term holding unless there is a very compelling reason to sell.

Analyst’s Disclosure: I am/we are long PDO. 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 (21)

Gary Gambino profile picture
Well, it took until the end of the fund’s fiscal year, but the cut has happened. New payout for PFL is 8.14 cents per month, down from 9 cents. I’m happy with my decision to sell PFL and buy PDO.
Excellent data and commentary, thanks.
Author, will you keeping inching into PDO over time?
Gary Gambino profile picture
@47845185 I will be reinvesting the dividends. For anything beyond that, it depends on how the fund performs and what the portfolio ends up looking like over time with more than 2 months of history under its belt. It also depends on what interest rates do. If high yield spreads moved back to the 7-8% level as we saw 3 times in the last 10 years, I would view that as a great time to buy more.
Question for Gary Gambino (or anyone else): I bought PFL at 27, giving me a current yield of over 10%. Also, if I sell now, I’ll have to pay short-term capital gains tax. Still a sell for me? Also I can’t find vehicles rhat come even close to the 10% + that I’m getting with PFL.
Gary Gambino profile picture
@managosin I’m not sure what you meant to say, but PFL has never traded at 27. Also, “current yield” is based on the current share price, so current yield is 9% at $12. If you are referring to the yield based on your cost basis, I am not a fan of that metric at all. Your cost basis is irrelevant. The only things that matter are is the dividend safe, and how does the yield compare to other securities available at today’s prices.

As to whether you should pay ST capital gains tax, it depends on how much time is left before it becomes LT. If it were a few days, I would say wait to sell. If it was six months, I would still sell. PFL probably won’t lose half its value in 3 weeks like it did last year but it could easily lose $1 in 3 months or $2 in 6 months as you can see on the 2014-16 price chart in the article. Full disclosure: I just sold some shares I bought on 6/3/2020 (ST) for $9.90.

Final point - my opinion is that total return matters. I’m happy to take a 7% dividend from PDO rather than a 9% one from PFL based on my belief that increasing rates will hurt PFL share price more, for the reasons I stated in the article. I am trying to maximize total return rather than income.
@Gary Gambino Sorry, I meant to say at 9.81! I was looking at AB, another stock that has done great for me: yield over 10% at the price I bought it and over 40% appreciation. What to do with PFL if I have to take over $10,000 in short-term capital gains?
Gary Gambino profile picture
@managosin sorry, but it would be irresponsible of me to provide individualized trade recommendations because everyone’s financial situation and goals are different. I (and all other writers here) am trying to list pros and cons that others should consider, along with their own personal circumstances, when making their own decision to buy, sell, or hold a security.
Forget PFL and PDO. BIGZ is the ticket. Cheers, Nikki.
Eileen Dover profile picture
@americanbrunette BIGZ just launched last week ! Will wait for some history and research other Pimco funds.
@Eileen Dover me too, likely, but based on BST, BSTZ, BME and BMEZ, this one looks very interesting. I will likely start with a small position and fill it out over time. Nikki
erniem profile picture
@americanbrunette Thanks for pointing that out. Like PDO, it's a new offering from a well established and excellent fund manager. I watch it with interest and probably will pick up some.
erniem profile picture
That's a nice analysis and pretty much mirrors my thinking. Most Pimco CEF's are market vulnerable, meaning that they can be volatile in rapidly changing markets, however they mostly have a great long term history.

I closed out my PFL position in November of last year, a couple thousand shares, and have started holding a bit more cash. I bought PDO when it came out and think that it's probably going to be a good investment. As Pimco funds go the numbers add up. We'll see. It was either an opportunity I took advantage of ( which I believe) or a mistake, lol.

Either way, increasing premiums and negative UNII have combined to make me increasingly wary of Pimco funds, which now need a perfect environment to continue to thrive, and that's a yield hungry market and very low overnight interest rates. I don't think many of us believe that this particular combination is going to continue indefinitely. NHS has been one of my replacement funds for the PFL I sold, and one that has performed well and has far better fundamentals for me, having been bought at a negative discount and only in the last month gone to a premium.
rickevantodd profile picture
Excellent article. I recently sold off a bunch of PCI & PDI due to the growth in the premium. Opened a position in PDO at a little over $20. Will watch before adding. Quite frankly, I am happy with a lower yield and volatility for a more sustainable distribution, which I reinvest anyway.
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