PAXS: An Early Peek At The Next PIMCO CEF
Summary
- PIMCO appears to be set to launch a new fixed-income CEF - PAXS - in the coming year.
- PAXS will have an overweight in real estate securities and a term structure.
- We discuss our playbook for PAXS when it begins trading.
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This article was first released to Systematic Income subscribers and free trials on Dec. 29.
In this article, we take a sneak peek at the PIMCO Access Income Fund (NYSE:PAXS) - what looks to be a new entrant into the PIMCO CEF suite. Interestingly, the fund appears ready to launch at roughly a similar time as the Dynamic Income Opportunities Fund (PDO) did last year. Because of this as well as other shared features, we compare PAXS to PDO to highlight differences and similarities which will provide more context than looking at PAXS in isolation.
Our key takeaway is that among the PIMCO taxable suite, PAXS will have a real estate overweight. This is mentioned explicitly in the fund's strategy description as we highlight below. This strategy is likely to focus on the commercial / office part of the market given the fact that PIMCO acquired the Columbia Property Trust for $2.2bn ($3.9 including debt) in early September. The first PAXS N-2 filing was made a month after the acquisition announcement.
PIMCO also made an earlier move into Real Estate in 2020 by assuming oversight of Allianz Real Estate with a business of managing more than $100bn of commercial real estate business.
The office market has continued to heal with net absorption (i.e. square feet that became physically occupied, minus the sum of square feet that became physically vacant) beginning to approach positive levels, suggesting the market is starting to move back into balance.
Source: JLL
However, it's important to keep in mind that office rents may not offer the same obvious inflation play as residential rents for two reasons. First, office vacancy rates are still elevated, ranging from a low of 10% in New York and Silicon Valley to 20-25% in New Jersey, Houston, Detroit, Atlanta, Miami and other large markets. And secondly, office rent escalation clauses are typically set at a fixed percentage rather than being tied to the CPI.
PIMCO laid out its real estate views in an earlier note where they discussed their focus on employers that will not offer from home as well as recent transactions.
Finally, it's worth addressing the ever important "where's the beef?" question. PIMCO funds generate a lot of interest and tend to trade at elevated valuations. Some investors, however, have likely been disappointed with the series of distribution cuts in the taxable suite over the last few years. If we had to summarize why PIMCO funds remain worth watching it would be with the following chart which shows 5Y total NAV returns of credit CEFs (i.e. those in the high-yield, loan, limited duration and multi-sector fixed-income assets). Red bars are PIMCO CEFs. The chart makes it clear that PIMCO funds have put in a strong performance over the last while within the broader space which means they deserve a look on the part of income investors.
Source: Systematic Income
The Basics
The PIMCO Access Income Fund (PAXS) will begin trading at $20 - a common convention in the CEF market and it is the price level which the Dynamic Income Opportunities Fund (PDO) was launched this year. PIMCO will eat the $0.52 underwriting cost which has become the convention in recent years for CEF issuers. Historically, underwriting costs had been passed down to fund investors, meaning the fund would launch at a significant premium. This is certainly a welcome transition.
The fund will have a management fee of 1.25% on total assets. Outside of the MLP-focused NRGX, this fee is 0.1% above the highest taxable PIMCO CEF fee and 0.33% above the current average taxable fund fee.
Source: Systematic Income CEF Tool / PIMCO Funds Tab
Over the last two decades PIMCO CEFs have been launched with progressively higher fees. PDO launched this year, sharing the highest fee with PDI and now PAXS will be launched with an even higher fee. This trend of higher fees is an unfortunate development and has a clear impact on shareholder returns.
Source: Systematic Income
Taxable PIMCO CEF returns have not increased in recent years so this fee inflation is not obviously justified by stronger returns.
Source: Systematic Income
Furthermore, as a proportion of the underlying asset yields today, the fees are very high. For example, when PTY was launched at a 0.65% fee, High-Yield corporate bonds were trading at yields of around 12% - a ratio of 5.4% fee to underlying asset yields. PAXS is being launched at a 1.25% fee in a market of 4.36% High-Yield corporate bond yields - a ratio of 29%. This rise from 5.4% to 29% speaks for itself.
Source: Systematic Income
Of course, PIMCO is not alone in keeping fees elevated or even raising them - other fund managers are suffering from this fee creep as well but it's still worth highlighting.
Investment Strategy
The PAXS investment strategy is very similar to that of PDO, and by extension, most other PIMCO taxable funds boasting a kitchen sink of credit instruments, with freedom to allocate across the broad credit space.
There is one unique aspect of the PAXS strategy in the PIMCO suite which is its real estate mandate. The section below, which is not shared by PDO, makes it clear it intends to have a significant allocation to the sector.
The Fund may invest in real estate investments, including equity or debt securities issued by private and public real estate investment trusts (“REITs”) or real estate operating companies (“REOCs”), private or public real estate-related loans and real estate-linked derivative instruments. The Fund may invest in and/or originate loans, including, without limitation, to corporations and/or other legal entities and individuals and/or residential and/or commercial real estate or mortgage-related loans, consumer loans or other types of loans, which may be in the form of whole loans, secured and unsecured notes, senior and second lien loans, mezzanine loans or similar investments.
Source: PIMCO
The section below is identical to the one in the PDO filing except for the addition of the text in italics which suggests that real estate could be a sizable overweight for the fund. At the same time, it is clear that the fund will not be a pure-play real estate fund as the majority of its allocation will be outside of the real estate sector.
As a matter of fundamental policy, the Fund will normally invest at least 25% of its total assets (i.e., concentrate) in real estate investments and mortgage-related assets issued by government agencies or other governmental entities or by private originators or issuers.
Source: PIMCO
Apart from the real estate focus, the next most important fund feature is its term profile. PAXS is launching with a 12-year term - its expected termination date will be 27 Jan, 2034. PDO also launched with a 12-year term with a termination date on 27 Jan, 2033. PIMCO is clearly replicating the PDO term feature for PAXS as well.
This is very good to see - term CEFs have a number of attractive features such as discount anchoring which results in a lower risk profile. More broadly, term CEFs, combine two attractive features of closed-end funds and open-end funds. As CEFs, they can carry significant leverage (and hence higher yields) and due to the term structure they share a measure of discount control of OEFs. Separately, a number of term CEFs also terminated this year which has reduced the population so new additions are good to see.
One consequence of the fund's term structure, as we touched on earlier, is that its premium is unlikely to match those of the higher-premium PIMCO funds which trade at double-digit premiums. For example, when PDO launched, some investors took the view that its premium was going to rise swiftly to match the other taxable PIMCO funds. That obviously hasn't happened as the chart below highlights.
Source: Systematic Income
It hasn't happened for three reasons. First, the term structure provides an anchor to its valuation - a rise in premium will act as a headwind into its termination since the premium will move back towards zero by the termination date (if it indeed terminates - shareholders can always vote to turn the fund into a perpetual fund). Secondly, PDO and PAXS have relatively high fee levels in the suite which means that their premiums should also be lower. And thirdly, we expect PAXS, like PDO, to launch with a relatively low current yield which would also pull lower its premium since investors tend to bid up funds with high distribution rates.
PAXS has a similar "50% policy" regarding its leverage such that its leverage "will not exceed 50%". PIMCO taxable funds have somewhat different leverage policies - the policy of PAXS is what we call a "hard" leverage policy. Other funds, such as PDI have somewhat softer language which gives the fund more leeway in capping its leverage level. A "hard" policy can cause the fund to deleverage more quickly in a drawdown as its mandate leaves no leeway of running the fund above the 50% leverage level.
The fund's duration strategy is typically vague - highlighting it plans to manage the fund in a duration range of zero to 8.
One surprising aspect of the fund's strategy is that its investment managers are its typical set of credit managers (Daniel J. Ivascyn, Alfred T. Murata, Joshua Anderson, Sonali Pier, Jing Yang and Jamie Weinstein) with no real estate dedicated managers. This seems odd given the significant real estate allocation but it may end up being a nothingburger since managers also rely to a large extent on other members of the PIMCO franchise.
Playbook And Takeaways
Our playbook for PAXS is the same as it was for PDO early last year and the secondary offering for PDI.
PDO briefly traded at a discount on its first day of trading which is something we highlighted live and, in retrospect proved to be a very good entry point as the fund hasn't traded below that level since then.
Source: Systematic Income
In October of 2020, PDI launched a secondary offering for 6% of its float which caused a sharp drop in its price with the premium falling from about 10% to around 5%. In fact, as we highlighted at the time, in pre-market trading, PDI could be had for a 3.5% premium which was not very far from its premium lows post the end of the COVID crash.
Source: Systematic Income
The key point here is that there are occasional periods in markets when the supply/demand picture is very unfavorable for a given fund. This causes its price to drop for non-fundamental reasons and often creates an attractive entry opportunity.
Depending on where the rest of the taxable suite trades, we would keenly watch the first few days of trading in PAXS for a potentially attractive entry.
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This article was written by
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Comments (18)
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Fingers crossed, though I have significant confidence in Pimco.
You can show them premium management teams. Premium returns over long periods of time. The inability to replicate the funds holdings. Who isn't used to paying a premium for premium results? The best teams in most fields earn their premium status. The bench warmers are bench warmers for a reason.
Oh yeah- they should open at less than NAV.... Ha
Your 1st chart shows that PDI has a 5 yr NAV return of approx 60%.
When I look at the chart on cefconnect it looks flat.
($25 five yrs ago and about the same now. FYI - I own PDI)www.cefconnect.com/...What am I missing?
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