Tag Archives: income-fund

Why I Sold Pimco High Income Fund

Summary PHK has managed to attract a premium near its historical average before its dividend cut. Although another cut is unlikely in the near term, the current premium is overly generous. Historical price trends have created clear buy and sell signals which indicate PHK is too pricey at its current premium. However, if PHK can continue its recent and opaque increase to NAV, a new higher price target may be in order. Pimco High Income Fund (NYSE: PHK ) consistently paid out the same dividend for over a decade, until a 15% cut that management insisted was reflective of the secular stagnation argument for lower global growth that has come to quietly dominate many economists’ thinking. In management’s words: “Generally, the changes in distributions for PHK, PCI and PDI take into account many factors, including but not limited to, each such Fund’s current and expected earnings, the overall market environment and Pimco’s current economic and market outlook.” The market’s response was unsurprising – the fund reached a 52-week low of 6.87 and saw its premium to NAV – once the highest in the CEF universe – fall to zero. This was a tremendous buying opportunity and I heavily added to my position before encouraging investors to not worry about a dividend cut anytime soon . A dividend cut remains unlikely. Since October, the new payout has remained steady. In November, NII covered distributions by 92%, and NII has remained just a hair under 10 cents since April, when NII fell precipitously to about 7.2 cents per share, as it also was in March and January. 92% is still not full coverage, leaving some investors concerned about PHK’s future payouts. However, PHK is preparing for an interest rate hike and the ability to buy new issues at new, higher rates. Prepping for the Rate Hike The duration of PHK’s holdings has fallen to 4.7 years as of the end of September, down from over five years earlier in 2015. The fund has been cutting the duration of its holdings for a long time in anticipation of raising rates, which actually hurt performance in 2014, as management acknowledged in its semi-annual report from September 2014 – and which management attempted to rectify by buying swaps: “Despite the Fund’s short exposure to the long end part of the curve, which has hurt the performance, overall increased duration exposure with interest rate swaps contributed positively to performance as Treasury rates declined.” Now the fund seems to be doubling down on its expectation of an interest rate hike. If Yellen does raise rates in December or early 2016 and high yield issues offer higher yields as a result, PHK will be able to churn into higher yielding debts and fully cover dividends more easily. (For more on how higher rates can be good for PHK, please see my two earlier pieces on the subject: Part 1 and Part 2 ). A Safe Payout – So Why Sell? The market seems to have accepted that PHK’s new distribution is about as safe as the old one, and may last just as long before being cut again. Yet I sold the fund because the market has overpriced the value of PHK’s new payout. As of November 25th, the fund’s premium over NAV was 24.65%, almost at the average premium the fund enjoyed over its lifetime before the dividend cut: In other words, the market is roughly pricing the fund’s ability to fund future payouts at the same premium as it has priced that fund’s future payouts before the dividend cut. At best, the market is punishing PHK with a premium that is 5% below its historical average. Is that sufficient for a 15% dividend cut? The Technical Concern There also is a technical argument to be made against buying PHK now – but keeping it on a watch list in the future. Since 2010, when the fund’s premium to NAV remained sustainably high, PHK has followed a steady pattern of slow appreciation to a peak, followed by a decline, and then a steady appreciation again: (click to enlarge) This pattern held for most of 2014 until the high yield market began to see serious risk aversion and a tightening of credit spreads at the end of the year, partly due to the strong dollar, partly due to rising oil prices, partly due to fears of collapsing liquidity, and partly due to fears of higher defaults resulting in an increase in interest rates: (click to enlarge) While I believe short-term speculation on asset prices is almost always a losing game, in the case of PHK the return to form seems to be congealing, and since the dividend cut the slow appreciation followed by a steep drop-off seems to be coming back to the name: (click to enlarge) However, we are currently not seeing a steep sell off as we did in the middle of September and earlier in November. This trendline, its historical performance, and its new payouts have all given me clear price targets to buy, sell and hold this stock which are currently telling me to wait until returning to the name. A Silver Lining? There is hope for PHK, however, which may help it close the gap on its current premium. In the last few days the fund’s NAV has shot up to its highest point since its dividend cut and the first sign of an increase in NAV since the beginning of 2015: (click to enlarge) It’s unclear how the NAV for PHK shot up so quickly in such a short period of time. Because bonds, especially high-yield bonds, are particularly illiquid, this could be the result of a new mark-to-market for a holding that was temporarily mis-priced due to thin trading. Alternatively, it could be a result of a cumulative appreciation of the high yield market as the fears of earlier in the year briefly fade. A third option is that the fund made a new purchase that was particularly undervalued by the market. In any case, the fund’s NAV shot up after the spread between high yield and U.S. Treasuries widened, giving more opportunities for fund managers to find high-yielding assets to fund distributions: (click to enlarge) This could mean PHK will find more ways to increase its NAV and close that gap between its current premium and the premium that it deserves after a dividend cut. I will continue to watch PHK closely to see if its ability to increase NAV is sustainable, or if the market decides to under-price the fund again. Until then, I’m waiting on the sidelines.

New Buy-Write Mutual Fund Aims To Outperform BXM Index

By DailyAlts Staff The CBOE S&P 500 Buy-Write Index (“BXM”) is a benchmark designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. So-called “buy-write” strategies involve buying a stock or portfolio of stocks (in the case of the BXM, it is the S&P 500 Index itself), and “writing” (or selling) call options on those securities. The objective of BXM and all buy-write strategies is to generate attractive risk-adjusted returns with lower volatility and less tail risk than long-only equity investments by generating income from the sale of call options. This isn’t a free trade however, as the seller of a call option caps the upside of the underling equity investment. Thus, when the underlying equity portfolio is experiencing strong returns, the buy-write portfolio can lag. This has certainly been the case over the past five years when the S&P 500 Index has had a strong run: (click to enlarge) Source: CBOE. Data as of November 6, 2015. However, when equity market returns are flat to slightly positive, or even negative, buy-write strategies can perform well, as we have seen this year on a year-to-date basis: (click to enlarge) With the outlook for equity market returns being relatively subdued, now may be a good time to consider a hedged equity strategy, such as a buy-write fund. Actively Manged Buy-Write Strategies While the BXM is a passively invested index, many buy-write funds take a more active approach (see Options Based Funds Outperform with Lower Volatility for more details on this category of funds). Thus, for investors interested in buy-write strategies with the potential to outperform BXM and possibly the S&P 500 Index, an actively managed fund is the right choice. And the good news is that one new fund is now available: the IRON Equity Premium Income Fund (MUTF: CALIX ). The IRON Equity Premium Income Fund’s objective is to provide risk-adjusted returns that best those of BXM. While BXM provides passive investment exposure, the IRON Equity Premium Income Fund utilizes an actively managed options overlay strategy. It is IRON’s belief that buy-write returns can be enhanced by “opportunistically writing” and actively managing options on underlying securities, rather than “unnecessarily writing options” and thus capping performance during bull markets, as passive strategies might. One of the greatest risk to buy-write strategies is that underlying stocks are “called” away during periods of greater-than-expected capital appreciation, thus limiting upside participation. Multiple Strategies to Add Value In addition to using a systematic approach to select options with appropriate expiration dates and lower odds of being exercised, IRON also utilizes proprietary “roll strategies” as part of its ongoing, active management of the fund’s options portfolio. Much of the fund’s performance depends on the performance of its underlying securities – the securities it holds and on which it writes calls – since the fund doesn’t overwrite or use leverage to sell more options than it could cover in the event of the options being exercised. Shares of the IRON Equity Premium Income Fund are available in A ( CALIX ) and I (MUTF: CALLX ) shares, with respective net-expense ratios of 1.45% and 1.10%. Both share classes require minimum initial investments of $10,000, and minimum subsequent investments of $1,000.

EVV And EVG: 2 More Eaton Vance Funds That Sound Alike, But Aren’t

Eaton Vance Limited Duration Income Fund sports a nearly 9.5% yield. Eaton Vance Short Duration Diversified Income Fund’s yield is around 8%. The risks involved favor the lower yield. Financial markets are in a state of flux right now. With the Federal Reserve continuing to keep interest rates at low levels, some might argue that there’s no need to worry. However, the Fed is keeping rates low because of weak global growth — certainly not a good thing. And how long can rates stay this low before unintended consequences start to rear their ugly heads? If you are the least bit concerned about the markets and interest rates Eaton Vance Limited Duration Income Fund (NYSEMKT: EVV ) and Eaton Vance Short Duration Diversified Income Fund (NYSE: EVG ) both sound like good places to hide in a storm. But that’s worth a closer look… Birds of a feather? EVV and EVG both share a similar mandate, providing investors with a high-level of current income. Capital appreciation is a secondary consideration for each. In addition, both closed-end funds, or CEFs, try to provide broad exposure to the fixed income markets while limiting interest rate risk. EVV’s duration is targeted to be between two and five years, while EVG is a little more conservative in that its duration is expected to be no more than three years. Although that’s a difference, it’s not exactly a huge one. At the end of the second quarter, EVV’s duration was around 3.2 years and EVG’s was around 2.1 years. Both funds, meanwhile, make use of leverage, something that can increase gains in good times but exacerbates losses in bad times. EVV and EVG even share five of six managers (EVV has six people steering the boat, EVG only five). One big difference between the pair is size. EVV has more than six times the assets of EVG, which helps explain why there’s an extra hand at the wheel. But this isn’t the only difference you’ll want to be aware of. The big obvious one for most investors will be the distribution yield. EVV’s yield is around 9.4%, roughly 17% higher than EVG’s 8%. That said, the yields are based on NAV at both funds, which are trading at over 10% discounts and are more reasonable, with EVV’s NAV yield at around 8.1% and EVG’s NAV yield of just about 7%. Based on this quick look, you might just go for the higher yield from the larger fund. But don’t jump just yet. A quick look at the engine Although duration is very important in the bond world, since it gives you an idea of the impact that interest rate changes will have on your return, it isn’t the only factor to watch for. (The longer the duration, the more impact interest rate changes will have.) Another important one is credit quality. While short durations can help to limit the risk of lower quality debt, since it will get paid off relatively quickly, it doesn’t remove the risk. And with investor concern high, low-quality debt has been taking a big hit. Perhaps rightly so. And that’s an important comparison point at EVV and EVG. At the end of the second quarter, EVV’s portfolio was made up of about 30% investment grade debt. So 70% of what it owns could be characterized as high-yield or “junk.” To be fair, BB, the highest-quality high-yield debt, makes up about 30% of that, but it still has heavy exposure to risky borrowers. EVG, on the other hand, had about half of its portfolio in investment grade issuers. There was another 25% or so in BB issuers. Of the two, EVG’s exposure to credit risk is much less than its sibling’s. That helps account for the lower yield, too, since higher-quality bonds tend to pay less interest than lower-quality fare. For investors concerned about a coming market storm, then, EVG appears to the less risky option. True, it has a lower yield, but that might be a worthwhile trade-off if you were looking at EVV and EVG to find a “safe” short-duration CEF bond fund to hide in. That said, there are some other factors to consider, too. For example, EVG’s portfolio is about two-thirds U.S. debt. EVV’s U.S. exposure is higher at around 85%. You could look at this difference in one of two ways. On the one hand, more diversification is better. On the other, sticking close to home may prove to be a more astute choice if the U.S. turns out to be the cleanest dirty shirt if, in my opinion when, the markets hit more turbulence. Then there’s the issue of long-term performance. Over the trailing 10 years through September, EVV’s annualized NAV return, which includes reinvested distributions, was about 6.4%. EVG’s annualized return over that span was about 5%. But that was then, and this is now. For example, over the trailing six months through September, EVG’s NAV loss was around 1.7% and EVV’s loss was nearly 3%. In September alone, EVV lost nearly 2% of its net asset value. EVG fell about 0.5% in September. So it looks like EVG has the edge when risk starts to matter, but EVV’s risk taking has paid off over the longer term. That, of course, is the big trade-off in investing: Risk vs. reward. Right now, I’d err on the side of caution and give EVG the edge if you are watching this pair. That said, if you buy EVG, you might want to keep an eye on EVV for a time when the skies are a little more clear.