'The Best Of Times, And The Worst Of Times' For PIMCO Global StocksPLUS & Income Fund

Summary

  • PGP's managers have done a terrific job earning an annualized 15% per annum on this PIMCO fund's net assets over the past 10 years.
  • But that's little consolation to investors who've lost their shirts because they bought it four or five years ago at nosebleed-level premiums of 60 and 70%.
  • In other words, PGP is a "poster child" for how premiums and discounts really matter to overall total return.
  • And the best portfolio managers in the business can't save you if you pay too far above what a fund is really worth.
  • The poor market price performance isn't the managers' fault, and investors shouldn't let it scare them off from buying PGP at more reasonable prices.
  • Looking for more investing ideas like this one? Get them exclusively at Inside the Income Factory. Learn More »

price grouging

Kameleon007/iStock via Getty Images

[This article was shared with my Inside the Income Factory members a month ago.]

___________________________________________________________

PIMCO's Best Performing Fund At NAV Currently Selling At Most Reasonable Price In A Decade

I never paid much attention to PIMCO Global StocksPLUS & Income Fund (NYSE:PGP) because its double-digit and, at one point, even triple-digit price premiums turned me off.

Over the past 13 years, PGP has sold in a premium range of 40-80 percent higher than the underlying net asset value ("NAV") of the holdings in its portfolio, even reaching a premium of over 100% about five years ago.

When we pay a big premium to buy a fund, no matter how well managed it is (and PGP is very well managed by two of the best that PIMCO has to offer: Daniel Ivascyn and Alfred Murata), it puts a heavy burden on the fund to deliver decent returns to those investors who paid so much more than the assets in the fund are really worth.

For example, if a fund has $100 in assets that earn interest of $9, that represents a yield of 9% to an investor who buys the fund for $100. But that $9 only represents a yield of 6% to an investor who pays $150 (i.e. a 50% premium) for the fund. If the premium went to 100%, and an investor paid $200 for the fund's $100 in assets, then the $9 earnings would only represent a yield of 4.5% on the inflated price.

If the fund wanted to actually pay a higher yield to the buyer who was paying the inflated premium price, then they'd have to really stretch and take on additional risk to do so. For example, in our extreme example (which is not so extreme in PGP's case), if the fund wants to pay a 9% yield to a buyer who pays a 100% premium, then it would have to go out and make actual investments earning 18% (actually even more to pay expenses). In other words, it would need to earn $18 on its $100 of real assets in order for the earnings to represent a 9% yield to an investor who paid $200 for those assets.

Even to the investor who "only" paid a 50% premium, the fund would have to buy assets that earn a yield of almost 14% in order to pay the investor 9% on the inflated price they paid. Obviously, assets yielding 14% are a lot riskier than assets yielding 9%, so the investor who pays a huge premium is actually taking a much bigger risk than they are being paid to take.

Discounts Are A Different Story

Premiums represent the other side of the coin, so to speak, to the advantage of buying funds at a discount. When you pay less than the assets of a fund are really worth (i.e. buy at a discount to NAV) then you have MORE assets working for you than you paid for, and you can collect a yield that is higher than the actual yield being earned by the assets in the fund. So buying that $100 worth of assets that earns $9 for a discounted price of, say, $90, means that you are earning 10% on your investment (i.e. $9 divided by $90), even though the fund only has to take the risk of holding investments that pay 9% on their par value.

PGP: Poster Boy For The Costs (and Risks) of Excessive Premiums

PGP's results show the effect of this. The NAV return, which represents the actual results the fund's managers have achieved with the assets they have been investing, has been superb: 15.1% annualized for 5 years and 10 years and 12.4% annualized for the life of the fund. But investors, depending on when they bought, have had a very different experience in terms of total return measured by market value, earning a paltry annualized 2.5% over 5 years, only 5.1% over 10 years and a somewhat more respectable but hardly "PIMCO-like" 8.1% since the fund's inception in 2005.

The difference, of course, reflects that for the last five years, while PGB's actual assets were earning 15%, the market's valuation of the fund dropped steadily from over 200% of its value to the current 106% of its value (i.e. a 6% premium, which is fairly modest by PIMCO standards).

To put the current 6% premium in perspective with past premium levels, if you bought PGP at a 60% premium five years ago and it dropped to a 10% premium over 5 years, that drop would have reduced your total return by about 10% per year, which explains the difference in return between NAV and market price. If you buy today at a 6% premium and it were to drop to par over 5 years, that would only nick a bit over 1% off your annualized total return, a risk worth taking for a fund that has averaged 12-15% annual returns (on NAV) over its life.

So if we think the managers are likely to continue doing the sort of good job they have been doing over the years, then this may be a good time to hop on this train while it is more reasonably priced. I've started a position and plan to continue adding on days when the price is down.

Distribution Well Covered

In addition to its excellent long-term record, PGP's current 7.3% distribution seems to be well covered by both its net investment income ("NII"), as well as by its GAAP income. NII, as we've discussed in other articles, is the interest and dividends a fund receives and represents the "gold standard" in terms of distribution coverage because it represents the (in most cases) steady cash flow the fund collects periodically from its own investments, even during periods when those investments may drop in market value. GAAP income includes the NII, as well as the gains and losses the fund experiences in the value of its portfolio (both realized and unrealized).

PGP's distributions were fully covered by its NII in both the year ending 6/30/2020 (by 129%) and recently 6/30/2021 (by 115%). GAAP coverage was negative in 2020, as it was in many if not most other funds that year, because of the huge market price drops early in the year, but those losses were more than reversed in the most recent year, when PGP's current distribution coverage from its GAAP earnings was a very healthy 460%.

Hey, What's This Fund Do, Anyway?

PGP is the sort of fund you would expect from a sophisticated shop like PIMCO, using a combination of cash markets, options and derivatives to create a global portfolio of equity and debt. Besides its other investment strategies, PGP says it may also employ a covered call strategy to generate additional income.

PGP is one of a number of funds that PIMCO offers using a version of what it calls its "StocksPLUS" strategy. This strategy combines an equity portfolio, often created via derivatives and options, with an actively and aggressively managed fixed-income portfolio; the goal being to generate an overall "alpha" return, with the equity generating the "beta" element and the fixed income portfolio providing the icing-on-the-cake alpha return. PIMCO's website describes it more fully and completely, but it strikes me as a smart way to leverage the firm's reputation and expertise in the fixed income markets to gain an advantage in the broader equity markets as well.

Here is how PIMCO makes its pitch: "With the vast majority of active equity managers underperforming their benchmarks, we see a clear need for clients to consider capital-efficient approaches to improve the level and consistency of alpha in their portfolios." They then go on to argue that combining a traditional equity strategy with the PIMCO "Our Bonds Are Different" approach will add that extra zip to what is essentially an aggressively managed "balanced" portfolio. So far the results have been good for quite a few years, so I am willing to commit some of my portfolio to it.

PGP is a small fund by PIMCO standards, with only $170 million of assets, of which equity capital accounts for about $114 million, and leverage about 33%, which is typical for closed-end funds.

Clearly, this is an opportunistic approach that has lots of flexibility to take advantage of volatile and shifting market conditions while using the broad array of talent and experience that PIMCO has. For those who want a more granular, in-depth, and detailed look at PGP's investments and strategy, I recommend @NickAckerman's recent article. For me personally, I see this as PIMCO's best performing fund, in terms of total return on NAV over the past five years, available for the first time in well over a decade at a reasonable price (currently a 6% premium).

Another PIMCO fund that uses a StocksPLUS approach that I recently started a position in is PIMCO StocksPLUS® Long Duration Fund (PSLDX). A fund originally designed for large institutional investors, PSLDX has an even more impressive long-term record than PGP. It is a traditional open-end mutual fund, not a closed-end fund, and if you buy it directly from PIMCO requires a million-dollar minimum investment. However, a number of brokerage firms, like Vanguard (which I use), Schwab, and others (but not Fidelity) offer it at more reasonable retail minimums or even no minimum.

I look forward as always to your comments and questions.

I launched Inside the Income Factory because many of my 12,000 followers and readers of The Income Factory® (McGraw-Hill, 2020) asked for more interactive dialogue than I could provide through public articles. Here's what members say: 

  • "Learned the hard way how exceptional Steven Bavaria and the Income Factory is"
  • "Eternally grateful"
  • "His investment approach and superior record are literally an 'open book' "
  • "Allowed us to hop off the roller coaster"
  • "Steven is where I make my money"
  • "Worth every penny"

I'm grateful, and think we must be doing something right. Why not give it a shot? click here to learn more.

Thanks,

Steve Bavaria


This article was written by

Steven Bavaria profile picture
12.93K Followers
Create your own Income Factory Exclusive insights and ideas!
Steven Bavaria publishes a boutique marketplace service - Inside the Income Factory® - here on Seeking Alpha, which helps members implement the strategy outlined in his book "The Income Factory: An Investor’s Guide to Consistent Lifetime Returns" (McGraw Hill, 2020).

  

Bavaria introduced the Income Factory philosophy in his Seeking Alpha articles over the past ten years, drawing on his fifty years experience in credit, investing, journalism and international banking. His earlier book "Too Greedy for Adam Smith: CEO Pay and the Demise of Capitalism" exposes the excesses in the CEO pay arena. Both books are available on Amazon. 


Bavaria began his career at the Bank of Boston, handling international credit workouts that included managing a fleet of ships, chasing a Vatican-owned bank in Switzerland, and leading the turnaround of troubled branches in Australia and Panama.

Later he worked at Standard & Poor's, where he introduced credit ratings to the leveraged loan market, helping to open the loan asset class to pensions, mutual funds and specialized investment vehicles like CLOs.

Bavaria graduated from Georgetown University and New England School of Law. He lives in Ponte Vedra, Florida.

Disclosure: I/we have a beneficial long position in the shares of PGP, PSLDX either through stock ownership, options, or other derivatives. 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.

Recommended For You

Comments (44)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.