PDI - Good News! PIMCO Funds Reverse Distribution Coverage Decline In February

2023-03-27 11:42:13 ET

Summary

• Last month there were doom and gloom articles about PIMCO closed-end funds distribution coverage ratios having decreased steadily over the past six months.
• Did this portend payout cuts?
• While nothing is certain, PIMCO's February month-end report of its funds' coverage ratios shows a significant turnaround.
• Bottom Line: the drop in coverage has bottomed out, and in some cases (including our funds PDO, PDI and PAXS) shows a sharp positive reversal.

[This article was first published March 16 for our Inside the Income Factory members.]

Turn-Around In PIMCO Fund Earning Coverage

In a recent article on PIMCO funds that we own - PIMCO Dynamic Income Fund ( PDI ), PIMCO Dynamic Income Opportunity Fund ( PDO ), and PIMCO Access Income Fund ( PAXS ) - entitled "What's Up With PIMCO Funds? Walking On Water? Or Under Water?" I noted that there had been a number of recent negative articles about the funds ( here and here ). Among other things, the articles pointed out how recent reports showed the funds' distribution coverages had deteriorated in over the past six months, which presented the threat of distribution cuts.

Distribution cuts (and increases too) are always an ongoing possibility in the closed-end fund world, and one that is hard to predict with any certainty. So I try to be somewhat philosophical about them, and expect there will be movements in both directions over time as our portfolios respond to, and move with, macro-economic trends, interest rate increases and decreases, credit cycles, etc. Having said all that, I still expressed hopes that PIMCO would try to hold the line on its current distribution payouts, given its history and the likelihood that its management was probably out seeking to take advantage of opportunities being presented by the volatile credit and financial markets. I still believe that, although nothing is certain, especially given the state of the markets this week.

With that as background, I am happy to report that the news from PIMCO itself is positive, if we examine its latest monthly report on the Net Investment Income coverage of its closed-end fund distributions.

This chart is one I put together combining the 3, 6 and full-year NII coverage ratios for all the taxable PIMCO closed-end funds for the periods ending month-end January and February. (If you want to see the actual PIMCO report, first click here and then click on "UNII Report" at top of the web page.)

The January month-end report was what got so many writers and investors concerned. It showed that PDI, for example, had slipped to a most-recent 3-month average rolling coverage ratio of only 24%, having started the fiscal year last July 1st with pretty healthy coverage, as evidenced by the fact that its fiscal-year-to-date coverage as of January was still a fairly healthy 69%.

Citing that drop, some analysts suggested PDI's payout may have been in real trouble, especially if the trend continued. Fortunately it has NOT continued, and readers can see that just one month later, PDI's 3-month rolling coverage number has almost doubled, to 43%. For the 3-month average figure to have jumped that much, obviously the actual most recent one-month figure must be even higher, which supports my own view that, volatile as the market has been, an outfit as sharp as PIMCO with as broad a mandate as its various funds have, is probably scouring the markets looking for opportunities... and finding them.

Our other PIMCO funds show even more impressive turn-arounds. Our model portfolio holding PDO, whose rolling 3-month NII coverage ratio had dropped to 33% last month (not that much higher than PDI's) has now bounced back to a healthy 3-month average of 83%, which suggests to me it is probably near full coverage on a most recent monthly basis.

Our other PIMCO closed-end fund, the relatively new PIMCO Access Income Fund, has done even better. Having only dropped to a 53% 3-month rolling coverage level last month, it has already popped back up to over 100%.

Bottom line, this is very positive for PIMCO funds. On the other hand, it's a crazy market out there currently, with so much else happening with the banking industry, interest rates and financial markets generally. So nothing is certain.

But I'm happy to take good news wherever we can get it.

Thanks for your comments and questions.

Steve

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