NRGX - Equity CEFs: NRGX May Be A Stealth Opportunity To Get More Bond Exposure

2023-10-09 11:50:31 ET

Summary

• Longer-term bonds are becoming more attractive to institutional investors as yields catch up to shorter-term paper.
• The NRGX fund experienced an NAV boost due to liquidation of a large private equity position.
• PIMCO is converting NRGX from a mostly energy and energy MLP stock fund to a multi-sector bond/credit fund, offering attractive valuation and potential for increased distributions.
• The conversion of NRGX to a new fund name and symbol is expected by the end of the year, which could end up being excellent timing for shareholders to get more bond/credit exposure.

Are we coming up on a golden opportunity to buy bonds? I can't say for sure, but as longer-term bonds continue to catch up in yield to shorter-term paper, longer-term bonds will become more and more attractive to institutional investors, particularly if we go into a recession and bond yields peak.

The question is, then, how can you get exposure, and how can you time a reallocation out of equities and into bonds? Well guess what? We already own a fund that's in the process of doing just that.

I sold out of most of my position in the PIMCO Energy & Credit Opportunities fund ( NRGX ) , $18.68 closing market price, -5.8% , last week when the name, symbol and strategy change was announced on Sept. 22, and NRGX soared to as high as $20 .

I, unfortunately, did not sell at that high price, and in fact, I'm starting to buy NRGX back at a price higher than when I sold it last week. But here's the reason why.

A few days after the press release , which laid out the name/symbol/strategy change from a mostly energy and energy MLP equity fund to a multi-sector credit and bond fund, NRGX's NAV inexplicably rose +10.3% overnight, from $19.98 to $22.03 .

There was no mention of where that windfall NAV boost came from but we can surmise that the fund probably completed the liquidation of a very large private equity position that constituted about 12.2% of the entire portfolio value.

That one position, Venture Global LNG , was worth more than $100 million of NAV value as of 6/30/2023, by far NRGX's largest position, but because it was a private placement, the fund may not have been able to update the current value until the sale was actually completed.

Here's a screenshot from NRGX's Annual Report as of 6/30/2023:

In fact, because of this rapid increase in value of this one position over the last few months, that may have been the reason why PIMCO decided to convert the fund to a multi-sector bond/credit fund since the actual cash increase could have been more like $190 million on a liquidation of this one position.

I'm guessing on that potential cash hoard but since NRGX's NAV increased $2.05 overnight last week, and since there are roughly 45 million shares outstanding, somehow NRGX's NAV increased by $90 million to a $990 million net asset fund. So it makes sense that this Venture Global LNG was probably the most compelling reason why.

In any event, PIMCO may have come to the conclusion that it would be a good time to cash out of their high equity exposure in energy and energy MLPs on a high note and reinvest the cash into bonds at historically low prices and extremely attractive yields.

That certainly makes sense to me, and with NRGX at a current -14.5% discount ( $18.68 market price, $21.86 NAV), that would put the fund at a very attractive valuation for a PIMCO multi-sector bond CEF, most of which trade at premiums.

The new fund, to be named the PIMCO Dynamic Income Strategy fund (PDX) , will look to keep roughly 25% of its total assets in energy-related securities. And though not addressed in the release, we can expect that the quarterly $0.22/share distribution will be increased and PIMCO may in fact, go to a monthly pay schedule. Here is another excerpt from the press release last week:

PIMCO expects that the changes will reduce the Fund's focus on investments linked to the energy sector in favor of a primarily income-oriented objective and broader, multi-sector credit mandate, which PIMCO believes has the potential to strengthen secondary market demand for the Fund's common shares.

In conclusion, the future PDX may be a stealth way to buy an equity fund with loads of cash right now and at a -14.5% discount and then see it convert later this year to a primarily income-oriented, multi-sector credit/bond fund.

I can't think of a better way to get more fixed-income exposure in your portfolio and with the added bonus of PIMCO management.

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