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Tracking Value In CEF Rights Offerings

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  • PCF is undergoing a non-transferable 1:1 rights offering.
  • Investors can track the value of rights offerings and their impact on the fund's NAV in our CEF Tool.
  • Take a 2-week free trial of Systematic Income to explore our Income Portfolios and our CEF Tool.

The High Income Securities Fund (PCF) is doing a rights-offering due to expire in about a week. One of the key questions for investors facing this situation is how to think about the fund's NAV. This is because it is very easy to be led astray. For example, PCF looks like its discount widened substantially recently and it's trading at an attractive valuation.

This is actually what we call a rights-offering mirage. This is because a rights-offering is dilutive to the fund's NAV. 

ROs are dilutive if the subscription price is below the fund's NAV, as is typically the case. Dilution happens because subscribers acquire the shares for less than their NAV so each share of the fund, post-offering, references less value than it did before.

The price typically adjusts for the estimated dilution amount on the announcement but NAV only adjusts once the new shares are issued and the dilution gets baked into the official NAV. This means the discount will look wider than it actually is until new shares are issued.

Investors can use our CEF Tool to play around with any given rights offering and estimate the expected dilution. In this case the expected dilution is around 6.71% which is roughly the widening in the PCF's discount. This means that PCF is not actually trading at a wider discount because its NAV will adjust lower by this amount on the expiration date. 

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