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PIMCO CEF Update: What's Driving Discounts Right Now?

Jul. 05, 2022 12:18 PM ETPDO20 Comments


  • PIMCO taxable CEF valuations have fallen sharply this year, underperforming the broader CEF space.
  • We discuss some of the key drivers of PIMCO CEF valuations relative to the broader CEF market as well as within the suite.
  • In an environment of high asset yields that we are going through now, lower valuation funds like PDO can pass on significantly more yield to investors than higher valuation funds.
  • I do much more than just articles at Systematic Income: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

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This article was first released to Systematic Income subscribers and free trials on June 27.

In this PIMCO CEF update, we take a closer look at valuations across the PIMCO taxable suite and highlight some of

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This article was written by

ADS Analytics profile picture

At Systematic Income our aim is to build robust Income Portfolios with mid-to-high single digit yields and provide investors with unique Interactive Tools to cut through the wealth of different investment options across BDCs, CEFs, ETFs, mutual funds, preferred stocks and more. Join us on our Marketplace service Systematic Income.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of PDO 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.

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Comments (20)

The products mentioned in the article all run with high leverage obviously, both regulated and unregulated.

Is there any way to gauge which of the funds mentioned are most likely to choose or be forced to de-lever near the bottom a la PCI in 2020?

Personally I have not added to PDO because of the risk of a sudden say 200 bps move in spreads upward at the same time base rates don't fall. My fear is that they would choose to deliver rather than suspend distributions. Trying to get past my fear lol.
Dick Cod profile picture
@Robin Heiderscheit Hi Robin. Not a crit at all, but it really sounds like you are looking as hard as you can for something to worry about. Even Fed bank and dealer stress tests don't include instantaneous 200bp spread widening. A terrorist could light off a nuke or an asteroid might hit Manhattan too, but if you can't let go of fear of extreme unforseen shocks it's Treasury bills for you. Consider: IF IF IF spreads instantaneously widened 200bps, PDO might be the LEAST damaged holding in your portfolio. Finally, consider the most obvious solution in more normal circumstances: if an asset stops working for you, sell it.
Regards, Dick
ADS Analytics profile picture
@Robin Heiderscheit There is a way to gauge deleveraging likelihood but it won't fit in this box. In my view spreads are less likely to widen 200bps when they are at 550bps than when they are at 300bps. And if they do why not just buy more. You aren't going to catch the peak.
@Dick Cod
Thanks for the reply, always appreciate your comments!

200 bps in 30 days has happened three times in the past 14 years (fall of 08, fall of 11 and winter of 20) so you are correct, it is unusual, although I would note that during each of those instances PTY (for illustrative purposes) underperformed SPY.

As the Wilford Brimley character in The Firm said when asked why he was investigating the Tom Cruise character "I get paid to be suspicious when I got nothing to be suspicious about". I earn superior returns over the long run by knowing more than the next guy and avoiding unnecessary risks.
Dick Cod profile picture
Excellent as usual. Good reminder on AARPs, which are easy to forget about --- unless you're a PIMCO manager. I can't help thinking that such an increasing source of leverage expense has been addressed with hedges.
Regards, Dick
Never any love for PCN.
@excenter I agree. PCN is actually my favorite fund. It's more stable than PTY and the others and its leverage is 8% lower at 38% than PTY, PDI, PDO, and PCM which are all running around 46%. I recommended it to my dad for extra income and had it since 2015. It's been one of Pimco best performers since its inception in 2001. It has had an average annual return of 10.39% at market value for almost 21 years! Only PTY and PDI have performed better. And it's premium is only 12% right now which is less than usual. It's 1-year Z-statistic is -1.09. It's coverage right now is at 116%. It's really a great buy in my opinion right now.
M Plaut profile picture
Great information, clearly presented.
Income4ever aka Cyclenut profile picture
"PIMCO taxable CEF valuations have fallen sharply this year, underperforming the broader CEF space."
"We discuss some of the key drivers of PIMCO CEF valuations relative to the broader CEF market as well as within the suite."

So why are you comparing to the Broader CEF space ??? When compared to the CEF fixed income space in most cases Pimco has faired much better than the rest.

Lumping everything into a larger general basket doesn't do any investor any favors ... its misleading and not appropriate comparison in my opinion
Terrific and very helpful. Long PDO, PDI and PFN.
@61yanks Me too and adding.
Great column.
PDO just increased their dividend!
Im surprised there wasn't a news release about it; but sure enough in the July dividend disclosure it says the dividend is now .1279/m vs .1184; so about a .01c increase.
rickevantodd profile picture
Another great article! tAt least, this time I understood a little more than the last article.
I normally don't invest in CEF's less than two years old; but I made an exception here. I own several PIMCO cef's for income, long term. Have full confidence in the long term for PDO. The managers are invested( Ivacyn has $500,000)
in the fund with the others, from day one . No one has sold. Within two years, it will be well above the initial NAV.
Thanks for a well written article.
scarp1952 profile picture
Excellent article. I remain concerned about further distribution cuts. We saw the PFN cut awhile back though they seem to be covering adequately now. I’m hoping for a special that will offset the cut.
@scarp1952 PDO just increased dividend by 8%
scarp1952 profile picture
@CEF-Boy I’m aware. Have held PFN and PDI for many years having purchased Alta discount to NAV. Pimco is a terrific manager but I try to avoid buying into premiums. 8% distributions increase is sweet. Have you ever explored BIT? Thanks
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