Summary PCI is the largest CEF by market cap in the taxable income category. PCI is paying a distribution yield of 10.5% and is priced at a historically low discount. The fund has suffered along with its category over the past year. Investors might ask if there is now value here. I began this series exploring taxable income CEFs with an overview of 105 CEFs in this category where I showed that the funds had been battered by the market, often well in excess of changes in net asset values. Some funds had cut distributions and the broad data suggest that others may follow. I am following up on that overview with a look at specific funds in the category. First up was the PIMCO Dynamic Income Fund (NYSE: PDI ) which I consider to be the best in the class in today’s skewed market. With this installment, I want to look at its sibling fund, the PIMCO Dynamic Credit Income Fund (NYSE: PCI ), which like many siblings, is fundamentally similar but distinctly different. I refer to the two funds as siblings because they share a similar lineage. They are young funds (May 2012 for PDI, Jan 2013 2013 for PCI) and the most recent additions to the PIMCO CEF line. The funds have similar sounding objectives, but unlike many sibling funds, come have at their objectives quite differently although there are signs that they are coming be more alike as they weather tough times in their category. Where PDI stood out as being at or very near the upper reaches of the group for many key metrics, PCI does not fare nearly as well. This chart shows its percent rank among the funds for various market characteristics. (click to enlarge) Figure 1 . PCI percent rank among 105 taxable, fixed-income CEFs. Liquidity This is an area where PCI outscored PDI but only by minor amounts. It is the category leader for market cap and ranks 3rd of the 105 funds considered for trading volume. But either fund has as much liquidity as one is likely to find among closed end funds. Discount Discount is a second category where PCI turns in a better number than PDI, at least in terms of absolute value. Its discount (-14.64%) ranks 65 of the 105 funds which have a median discount of -13.2%. The fact that a fund can be that deep into discount territory and still be outpaced by 1//3 of the category’s funds shows how difficult times have been for taxable income CEFs. The discount/premium Z-scores show us that this discount is not only deep, it is much deeper than its average value has been over the last 3, 6 or 12 months. (click to enlarge) Figure 2 . PCI Z-Scores for PDI and median values for the category. The discount has been on an expanding trend since early in 2014. Indeed, at its current value, PCI’s discount is at an historic low for the fund. (click to enlarge) Figure 3 . PDI Premium/Discount since inception (end month values). Discounts are without question appealing, and historically low discounts can be especially appealing, but one does not — or, I should say, should not — buy a CEF on the basis of discount alone. Distributions Fixed income CEFs are designed to provide regular income to their shareholders. Most pay out a stable distribution and managers are generally reluctant to reduce those distribution. To a large extend investors value the funds on the basis of those distributions. Here again, PCI is turning in better numbers than PDI. Its distribution at NAV is 8.98% (75% percentile for the category), slightly above PDI’s 8.72%. Its deeper discount pushes the distribution to shareholders well above PDI’s. It is currently paying 10.52% on the basis of its regular distribution; PDI pays 9.53%. The regular distribution currently stands at $ 0.16406/share. It was increased for the September 2015 payment from $ 0.15625/share a value that had been constant from the fund’s inception. This is a 5% increase. PCI has also paid out a special distribution in each of its two years of operation. In 2013 it was $0.36 and for 2014 it was $0.60. If one considers the special distribution, current distribution yield through the past twelve months is 13.14% which would place PCI at the 97%tile of the category. Figure 4. PCI. Regular and special distributions since inception. Of course the difference between the regular distribution at 10.52% and the regular plus full distribution of 13.14% is considerable, but is not predictive for future yield from the fund. The special distributions are special and variable. An investor cannot count on them. One indicator of expectations for a year-end special distribution is undistributed net investment income (UNII). This is where PDI excels, but PCI falls short. Cefconnect list PCI as having -$0.0656 in UNII. Not enough to cause real concern, but it is in negative territory which would indicate that a large year-end special distribution based on excess income will not be forthcoming in 2015. Summing up the distribution situation, PCI has an exceptionally high distribution yield driven in part by its large discount. It looks sustainable at this time. On the surface it is higher than that of PDI but when one considers the history and likelihood of special distributions in the mix, PDI is returning a greater yield. The other significant aspect of UNII is that it is a predictor of distribution stability and sustainability. This is obvious from the recent fall of the PIMCO High Income Fund (NYSE: PHK ) as documented in this recent article on Seeking Alpha . If you are concerned about the stability of distributions for any CEFs you may hold or be researching, I refer you to the cases explored there. Where PDI is at the top of the category for UNII/Distribution, PCI is only at the 37%tile. This has not prevented managers from raising PCI’s distribution, so I’m not inclined to see it as an indicator that the fund’s distribution is in trouble. If I were holding PCI I would be watching this metric carefully in the coming months. Fund Performance Actual return is a interesting facet of CEFs. On one hand there is return to an investor, which is the market return. On the other there is return on NAV which is the true indicator of how a fund is performing. Premium/discount status determines the differences between the two. PCI has outperformed only 38-39% of the category’s funds for total return on market price and NAV for the past year. This is far from an encouraging performance record, particularly when one considers that it has not been a good year for fixed-income. The median fund has a total return on NAV for the trailing twelve months of -0.2% and at market price it’s -5.98%. For PCI 1yr return on price is -7.2%. These returns show make an investor wary of PCI at this time. If tough times persist in fixed income, and there is ample reason to believe they might, declines in price (both at market and NAV) may continue to erode value for the fund’s investors. Add the fact of negative UNII (slight, but negative nonetheless) and PCI’s high yield begins to look much less attractive. I’ve been focused on PCI relative to PDI and the other funds in its category. I’ll now turn attention to PCI itself. What is the fund about. PDI has been operating for a bit over 30 months (inception date: 29 Jan 2013). It has a category-leading total net assets of $2.57B and its effective leverage of 42.44% is higher than all but one fund in the taxable income category. Management fees and other expenses are 1.382% excluding interest expense and 1.501% with interest costs (data from Pimco ). Morningstar compares its performance to Barclays US Aggregate Bond Total Return and its Multisector Bond category. It lists only 2014 and 2015 (YTD) comparisons and the fund underperformed in 2014 but is doing relatively well YTD. Fund Characteristics PCI has a broad investment mandate but is somewhat more focused than PDI. From the sponsor’s website : The fund will normally invest at least 50% of its net assets in corporate income-producing securities of varying maturities issued by U.S. or foreign (non-U.S.) corporations or other business entities, including emerging market issuers. Corporate income-producing securities include fixed-, variable- and floating-rate bonds, debentures, notes and other similar types of corporate debt instruments, such as preferred shares, convertible securities, bank loans and loan participations and assignments, payment-in-kind securities, zero-coupon bonds, bank certificates of deposit, fixed time deposits and bankers’ acceptances, stressed debt securities, structured notes, and other hybrid instruments. As for types of investments: The fund will normally invest at least 80% of its net assets (plus any borrowings for investment purposes) in a portfolio of debt instruments of varying maturities. The fund will normally invest at least 25% of its total assets (i.e., concentrate) in privately issued (commonly known as “non-agency”) mortgage-related securities.: And, “The Fund may normally invest up to 40% of its total assets in securities of issuers economically tied to emerging market countries. This definition is broad and flexible. Its successes or failures will depend on the abilities of management to handle that flexibility. Most of the management team (Daniel Ivascyn, Sai S. Devabhaktuni, Mark Kiesel, Elizabeth O. MacLean and Alfred Murata) has been place since the fund’s inception. Fund documents state that the fund “will normally maintain an average portfolio duration of between zero and eight years.” This is identical to PDI and Morningstar lists effective duration at 2.27 (unadjusted) and 3.91 (adjusted for leverage) which is about a half year longer than comparable durations for PDI. No information is provided on the portfolio’s credit quality. The fund’s holding by sector allocation on market value is (from the PIMCO website): This sector breakdown varies form that of PDI in one important element; PDI has twice as much of its portfolio in mortgage securities. For PDI mortgage securities comprise 2/3 of the portfolio; for PCI it is only 1/3 but that is a substantial increase in the last four months. I last looked at the two funds in May 2015. At that time PCI held only 0.11% in mortgage-back securities. Another change since May is in the geographic distribution of the fund’s portfolio. This chart from the May article shows where PCI was positioned at that time: Figure 5 . PCI. Geographical distribution of the fund’s portfolio in May 2015 (taken from Is It Time To Sell These PIMCO Closed-End Funds? ). Compare this distribution to the current distribution shown in the table below. The current geographical breakdown of the portfolio from Morningstar is: In less than 4 months time the portfolio has been repositioned to strongly favor U.S. bonds, while U.K. and Canada exposure has dropped precipitously from 3/8 of the portfolio to less than 4%. Brazil and Ireland did not even show up in May, now they represent more than 5% of the portfolio. This comparison illustrates the dynamic nature of PCI’s portfolio management. Brazilian bonds are currently the largest holding in the portfolio. With the recent downgrading of Brazil’s sovereign debt to junk status, management’s move into the sector may have been less than timely. The fund’s top 10 holdings sorted from PIMCO’s downloadable spreadsheet are: PCI shares the same risk factors facing PDI in the coming months. Interest rate risk with the on-going anxiety over rising interest rates is primary. The meltdown in emerging markets is also a factor. Each has been weighing on the space for some time. Together they have taken their toll on the fund’s NAV returns and, more severely, on the fund’s returns to investors at market. I do not expect the inevitable uptick in interest rates to be characterized by sudden and markedly disruptive increases. Rather I expect gradual changes that a well managed fund should be able to handle. Indeed, as rates do begin to rise, I would prefer to have my fixed-income allocation positioned to emphasize proven management. PCI’s managers have decreased duration over the past year and “has an outright short on the long-end of the curve” (June 30, 2015 Quarterly Commentary). I have been holding a position in PCI. While I am confident that the fund will continue to deliver excellent income I am concerned about the declines in principal and for the near-term future of the category itself. I am not concerned about the stability or sustainability of the distribution and am encouraged in this view by the small but meaningful increase in that distribution this month. The historically low discount is only of interest to a new buyer, and a new buyer may find value there. To someone holding the fund with no inclination to add to the position, the increasingly deep discount is more of a frustration. In summary, I will continue to hold the fund but if I were considering a new position in a taxable income CEF, I would be more likely to go with PDI, its older sibling, at this time. Disclosure: I am/we are long PCI, PDI. (More…) 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. Additional disclosure: I remind readers that this article does not constitute investment advice. I am passing along the results of my research on the subject. Any investor who finds these results intriguing will certainly want to do all due diligence to determine if any investment mentioned here is suitable for his or her portfolio. As always I welcome your comments and critiques, particularly from those readers who have contrary opinions.