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PIMCO High Income: Here Are A Few Examples Of Easy To Find Alternatives

PHK is still trading at a premium. It’s distribution is still high, even after a cut. There are other options, if you care to look. I may sound like something of a broken record on PIMCO High Income Fund (NYSE: PHK ), but I don’t think the worst is over yet for shareholders. At the very least, after the recent dividend cut, it’s worth questioning your commitment to the fund. Here’s why I’m still concerned and a few options to look at. It’s still risky So it might be easy to understand why I would be negative on a closed-end fund, or CEF, with a 60% premium, which PHK sported not too long ago. But why am I still negative after that premium has fallen so far and the dividend has been trimmed? For starters , the nearly 15% premium at which PHK currently trades is still pretty rich on an absolute basis, even though it’s much lower than it was before. Few CEFs trade that far above their net asset values, with most actually trading at a discount. Second, the fund has a distribution yield of around 18% relative to its net asset value, or NAV. (Based on market price the distribution yield is closer 16% because of the premium to NAV.) Think about that for a second. This is a bond fund, albeit an aggressive one, that has to send investors 18% of its assets each year in distributions. In order to do that it will need to generate a return of at least that much or it will be eating into net assets. A decade ago the NAV was over $14 a share, today it’s under $7 a share. To be fair, if you look at the fund’s total return, which includes reinvested distributions, it has done well overall. But if you have been living off of those distributions, the picture isn’t as sanguine. Add in the recent dividend cut and the warning signs aren’t just written on the wall, they have slapped investors in the face. At one point shareholders could hang their hat on the fact that the distribution hadn’t been cut, even during the deep 2007 to 2009 recession. But that’s just not true anymore. And with the payout still so large, you should be thinking about the possibility of more cuts to come. Alternatives So what should you look at? If you just love PIMCO and can’t imagine allowing any other asset manager the chance to run your bond money, there are plenty of alternatives for you to consider. In fact, if you love PIMCO and think PHK’s managers, Alfred Murata and Mohit Mittal, are geniuses, you still have plenty of options . The pair also run Income Strategy Fund (NYSE: PFL ), Income Strategy II Fund (NYSE: PFN ), Corporate & Income Strategy Fund (NYSE: PCN ) and Corporate & Income Opportunity Fund (NYSE: PTY ). These are all different funds, of course, but all four offer distribution yields of around 10% or so and all but one trades at a discount to NAV. PTY, the only one of the quartet at a premium, trades hands at roughly 2% above its net asset value. That’s a lot more reasonable than nearly 15%. And just so we’re on the same page, of the five closed-end funds mentioned so far, only PHK has cut its distribution recently. That’s no guarantee that the other four won’t or that PHK will cut again, but if I had to pick a fund to be concerned about, I’d go with the one that stands out the most… PHK. There are other PIMCO funds with different managers that you could look at, too, of course. But what if you weren’t married to PIMCO (or the two managers of PHK), you could look at funds from any number of reputable asset managers. If you don’t know where to begin, just head over to CEFA.com, the Closed End Fund Association’s free site. Go to the Advanced Search tool from the Fund Selector drop down in the navigation bar. Select “general bond funds” as your classification, which is where PHK lives, and there’s a whole list of options for your perusal. A couple of easy to find examples with good pedigrees: Eaton Vance Limited Duration Income Fund (NYSEMKT: EVV ) and BlackRock Multi-Sector Income Trust (NYSE: BIT ). Both trade at discounts to NAV and both have distribution yields in the 9% range – notable, but not frighteningly high. And BlackRock and Eaton Vance are names at least on par with PIMCO in the asset management business. The point isn’t to suggest that any of the alternatives I’ve thrown out are the perfect one for you or anyone else. My point is to show that there’s no need to be locked into PHK because finding similar funds isn’t hard. You will have to be willing to accept a lower yield. But based on PHK’s unusually high yield and the cut that’s already taken place, less income seems like it could be a real possibility even if you don’t look for an alternative. Hindsight is 20/20. The time to get out of PHK was when it was trading at a huge premium. If you didn’t jump ship then, so be it. Mistake made, now it’s time to learn from what took place. That’s even more true since PHK still trades at a notable premium and still has a frighteningly high distribution yield. My two cents is that it won’t hurt to consider some easily found alternatives.

This PIMCO CEF Has A 12.2% Distribution And A -9% Discount

Summary PIMCO Income Strategy Fund II is a closed-end fund with a broad mandate in fixed-income investments. It has kept pace with or beaten its peers for price and NAV returns. It is selling at a -9% discount, and yielding 12% at market. Editor’s Note, September 2, 2015: The author has revised the title and content to correct the erroneous distribution rate, as explained in the comments section. There has been a huge sell-off in high-yield, fixed-income closed-end funds. Uncertainties abound in high-yield fixed-income, so most carry substantial risk and are probably best avoided at this time. The more speculative investor, however, may be inclined to shop for bargains. One such bargain could be the PIMCO Income Strategy Fund II (NYSE: PFN ). Along with its peers, PFN has seen sharp moves in its discount, which has dropped to a point well below where it was a year ago. But, in a volatile space, PFN has quite consistently turned in respectable performances while paying out high distribution yields. Performance For openers, let’s note that the fund has performed reasonably well over time. The following charts (from cefconnect.com) show its performance in comparison to the category of Fixed-Income, Multi-Sector CEFS. (click to enlarge) As we see here, the fund has outperformed the category every year since 2008 on both NAV and market returns. Recent returns have been ugly for PFN but even so, the fund has managed to outperform the category where things have been even uglier. (click to enlarge) The fund has turned in a positive NAV return for 1 year and 6 month periods while its peers have been deep in the red. Although one-year return at market is in the red, the fund’s NAV total return for the period (from cefanalyzer.com) stands at 2.50%. This compares to a median for the entire fixed-income category of -0.26%. My point here is not that PFN has shown outstanding recent performance, nothing in this space has, but that it is sufficiently well managed to have consistently outperformed its peers through good and bad times. The fund was managed by Bill Gross prior to his departure from PIMCO a year ago. It has been managed by Mohit Mittal and Alfred T. Murata since Gross left. Along with several of the other funds that had been managed by Gross, the fund suffered with the management change. When I wrote about PIMCO funds at the time ( here ), several readers expressed strong confidence in the future of PFN. Despite the deepening of the discount discussed below, that confidence does not seem to have been misplaced. Discount and Distributions The current discount for PFN is -9.93%, well below its 52 week average discount of -2.96%. The 1-year Z-score (a measure of how far the discount is from its average value) stands at -2.45, which means the current discount is nearly 2½ standard deviations below the average for the past year. One can easily exaggerate the importance of Z-scores, but they help to identify potentially attractive entry points. The current distribution rate is 12.21%, which includes a special distribution in December. Without considering the special distributions, the fund yields 10.2% vs. a category median of 8.14%. The regular distribution of $0.08/share has been stable since 2012 when it was raised from $0.065/share. One might compare PFN to another PIMCO fixed-income CEF, the PIMCO High Income Fund (NYSE: PHK ) which has run substantial premiums (as high as 67% earlier this year). PHK currently pays 24.07% as its premium has fallen to 33.15%. It too is paying a special distribution, without which its yield is 15.43%. I have considered PHK’s massive premium to put the fund’s value at risk, but its exceptionally attractive yield continues to appeal to investors. As noted above, PFN has been a consistent performer over a long time scale. PHK, by contrast, is woefully underperforming its category on any measure but distribution yield. It will be interesting to see if that 15% yield can continue to sustain the still-outsized premium. Eli Mintz emphasized the relationship between NAV Yield and Premium/Discount as an indicator of value in municipal bond CEFs. Applying his observations here generates this chart. (click to enlarge) Following Mintz’s analysis, funds falling below the trendline are worth exploring for potential value. Clearly, by this criterion, PFN represents high value and PHK represents the lowest by a considerable margin. Be aware, however, that like most single metrics, the Mintz relationship is only an indication that may provide insight into funds worth looking at in some detail. for example, from this chart one might consider the Stone Harbor Emerging Markets Income Fund (NYSE: EDF ) and the Stone Harbor Emerging Markets Total Income Fund (NYSE: EDI ) as standouts. Their yields are high (above 15%) but even a cursory look at these funds might discourage investors who look beyond yield. Summary PFN appears at this time to be a strong candidate for an investor who considers high-yield fixed income to be ripe for entry. The fund has a solid history of outperforming its peers, pays an attractive and stable distribution, and is priced at a substantial discount relative to its recent history. It has effective leverage of 19.33%, below the category median of 30.26%. Leverage-adjusted portfolio effective duration is modest at 4.16 years (data from PIMCO ). Without question, the high-yield sector is a high-risk sector. This is particularly the case in today’s unsettled market. Disclosure: I am/we are long PFN. (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 fund 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.