By Michael Foster
A little over two months ago, in an article for Contrarian Outlook , I spotlighted a nice short-term buying opportunity in the PIMCOGlobal StocksPlus & Income Fund ( PGP ).
PGP, with its 9.4% current dividend yield, is one of the most popular PIMCO funds, but it is one with a checkered past. And by checkered, I mean this:
Not for the Faint of Heart!
With up and down swings of 20% and more in a matter of months, PGP is a really volatile fund. And note those big dips in mid-2016 and mid-2017. ThereaEURtms only one reason why huge drops like those appear for a closed-end fund ( CEF ) like PGP: dividend cuts.
Income Falls Apart
PGP has cut its dividend twice in the last three years, and thataEURtms likely just the beginning.
Over the last six months, PGP has earned less than three-quarters of its dividend payout, although dividend coverage has been improving in the last couple months. Still, thataEURtms unlikely to last long, because of PGPaEURtms portfolio.
Despite the name, PGPaEURtms portfolio doesnaEURtmt have many stocks in itaEUR"in fact, stocks make up less than 10% of the fundaEURtms holdings. Instead, PGP has a lot of bondsaEUR"and since management is betting on rising interest rates, many of PGPaEURtms holdings are short-term bonds that have really small yields.
PGP Bets on Fast Money
Source: PIMCO Asset Management
ThataEURtms a decent strategy for total returns, but it also means that PGP will likely cut its dividend again before the end of the year to make sure it isnaEURtmt forced to sell its holdings to cover its payout, thereby driving down its net asset value (NAV, or the market value of its portfolio).
And that wonaEURtmt be pretty for shareholders.
On January 2, 2018, PGP announced that it would cut its distributions by 16.8%, to their current level. The fund immediately did this:
Dividend Cut Dents PGPaEURtms Price Chart
That was just the beginning. PGP kept falling and never fully recovered until I recommended it in June:
PGP Blooms in June
This chart tracks PGPaEURtms price action until June 7, when I wrote in my article that this fund looked attractive. The reason? Its premium was far lower than its average level, and the investor pile-in was perfectly primed. HereaEURtms how PGP has performed since then:
A Sudden Recovery
With dividends included, weaEURtmre up 8.2% since my article publishedaEUR"not a bad return for two-and-a-half months! But all good things must come to an end.
Time to Sell Now
So why is now the time to dump PGP? ThataEURtms a story that can be told with one chart:
Back to the Status Quo
You read that right: after dipping to a premium of under 20%, PGPaEURtms premium to NAV has steadily soared to 54.2% since my June article, which is just about the same as PGPaEURtms average premium of 53.3% over the last decade.
There is a chance that this fundaEURtms premium could soar higheraEUR"weaEURtmve seen it shoot up to over 100% before! And I wouldnaEURtmt be surprised to see PGPaEURtms premium go above 60% before it starts climbing downaEUR"but thereaEURtms a risk that it never will hit those heights, which means holding on to PGP right now, after such a big short-term gain, could run the risk of being left holding the bag when the market realizes this fundaEURtms premium has gotten too high.
But thereaEURtms another red flag.
Whenever you want to judge a CEFaEURtms real performance, you need to look at the total NAV return, which calculates the portfolioaEURtms return including dividends.
On that mark, PGP is about flat so far this yearaEUR"which is pretty close to what the junk-bond index funds have done for 2018. (These are the closest index funds to PGP, considering its heavy focus on corporate bonds and derivatives.)
However, that performance is far worse than PIMCOaEURtms other junk-bond and derivative funds, the PIMCO Dynamic Credit and Mortgage Income Fund ( PCI )aEUR" orange line belowaEUR"and the PIMCO High Income Fund ( PHK ) , in red, which are up solidly (and with little volatility) in 2018, despite a tough environment for junk bonds:
PGP Falls Off the Pace
Yet PHKaEURtms premium is far less than that of PGP, at 36.2%. And PCI? That fund is trading at a measly 1.3% premium, one of the smallest premiums for a PIMCO fund.
That means PGP could fall a long way before its premium matches those of its better-performing peers.
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