PTY - PTY: One Of Their Best Over The Last Decade Still Hold

2023-05-02 07:00:00 ET

Summary

• The PIMCO Corporate and Income Opportunity Fund is one of PIMCO's best performing CEFs over the past decade and during shorter time periods too.
• This article reviews the CEF for holdings, returns, and risk factors.
• There are some interesting data differences between sites for PTY. I mention the ones I found and those listed in another recent article on PTY.
• PTY 15+% premium is a "no go" for me despite its past performance. Two other PIMCO CEFs seem better currently; both are mentioned.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

PIMCO is a global leader for Fixed Income investing and their website gives PIMCO's overview of their firm:

PIMCO is a global leader in active fixed income with deep expertise across public and private markets. Our extensive resources, global presence and time-tested investment process are designed to help provide our clients with an edge as they pursue their long-term goals.

Source: pimco.com

This diagram outlines their investment process.

But even the best process runs into years like 2022.

When comparing NAV results, the PIMCO Corporate and Income Opportunity Fund ( PTY ) was the top performer but being only 3rd where it counts, price-based results, which is nothing to complain about though.

This article takes a look at the PIMCO Corporate and Income Opportunity Fund as one of PIMCO’s top performers over the 1, 3, 5, and 10-year periods. I also reference an article that pointed out their concerns about PTY that might not be readily seen by most investors, including myself.

PIMCO Corporate and Income Opportunity Fund review

Seeking Alpha describes this CEF as:

The fund invests in fixed income markets across the globe. It invests in corporate debt obligations rated in the lowest investment grade category Baa or BBB and in the highest non-investment grade category Ba or BB. The fund focuses on intermediate maturity bonds across multiple industries and sectors. It employs fundamental analysis along with top-down approach to make its fixed income investments. The fund uses in-house research to make its investments. PIMCO Corporate Opportunity Fund was founded on December 27, 2002. Benchmark: ICE BofA US High Yield TR USD.

Source: seekingalpha.com PTY

PTY has $1.5b in AUM with a Forward Yield of 11.1%. PIMCO lists fees as:

• Management: 65bps
• Expenses: 12bps
• Interest expense: 43bps.

While the first two are relatively stable, FOMC actions is rising the cost of the 35% leverage employed as that cost was 10bps lower last summer. Leverage is made up of these components:

Benchmark overview

While PTY is actively managed and not beholden to its benchmark, a brief description adds insight s to what Fixed Income assets might be of interest to PTY’s manager. I found this index definition:

The ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market. Each security must have greater than 1 year of remaining maturity, a fixed coupon schedule, and a minimum amount outstanding of $100 million. Original issue zero coupon bonds, "global" securities (debt issued simultaneously in the eurobond and US domestic bond markets), 144a securities and pay-in-kind securities qualify for inclusion in the Index. Callable perpetual securities qualify provided they are at least one year from the first call date. Fixed-to-floating rate securities also qualify provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security.

Source: fred.stlouisfed.org BAMLH0A0HY

Holdings review

PIMCO adds this allocation information to what Seeking Alpha supplied:

The fund may invest a maximum of 25% of its total assets in non-U.S.-dollar-denominated securities and a maximum of 40% of its total assets in securities of issuers located in emerging market countries. The fund will normally maintain an average portfolio duration of between zero and eight years.

Source: pimco.com PTY

The following data was last updated for 3/31/23. Some is reported based on market-value (MV) and some based on duration-weighted-exposure (DWE). For definitions of each, I provide a link .

With only three industry sectors above 5% and only one over 8%, PTY is well diversified on this risk variable.

I suspect the much higher weight for DWE versus MV for the US government related holdings is the fact PTY can hold interest-rate swaps, which should help control the portfolios duration, which is 3.41 years. This compares to 7.5 years for the WAM.

Hopefully the 20% maturing in the next year will allow PTY to reinvest those funds into higher yielding debt. The current WAC is 7.76%. The country allocation is 71% in the US and most of the rest spread across Europe.

With a large percent of the portfolio Not Rated, it makes it harder to come to a conclusion about the credit risk based on this data.

I estimate the portfolio has a weighted rating of BB-.

Top holdings

This list ignores the assets held that are part of the leveraging.

The top holding, Wesco Aircraft Holdings, was acquired in a public-to-private transaction in January 2020 by Platinum Equity. Holders of Wesco Aircraft apparently got what is shown in place of the debt they held. My search didn't find more details about the transaction.

Distribution review

In September 2021, the payout was reduced to $.1188 from $.13, where it had been for almost a decade. While all the sites I usually check to see if any ROC was used did not reveal any, the 8937 form on PIMCO's site tells a different story for part of 2021.

I check other recent years and did not see any other 8937s for PTY. As a recent article by another Seeking Alpha Contributor pointed out, sometimes you need to dig deep to find tax information that is the most accurate when it comes to distributions.

Price and NAV review

Price Chart

While not at the extreme levels 2-4 years ago, PTY has sold for smaller premiums recently. It appears the last discount occurred in the summer of 2015 and has been a very rare event.

Data issues??

Investors can only make good decisions if they have good data. That was my job when employed by a major corporate pension fund manager: make sure the data the analysts used was of the best quality. I was reminded of that while reading Blue Harbinger's article PDI And PTY: Unwelcome ROC, Buyer Beware . They pointed out one issue I already mentioned, the accuracy of data around where the distributions are source from. Another difference in our articles is the top holdings. They used a site I trust, CEFConnect.com but it appears that site counted leverage assets, not just ones held for investment purposes. I also noticed that the maturity allocation differs between CEFConnect and PIMCO; again the reason could be inclusion/exclusion of leveraging assets.

Portfolio strategy

After nearly forty years when fixed income investors saw interest rates dropping, with minor upward movements, 2022 was a wake-up call to the idea that non-short-term bonds and Preferred stocks are not risk-free assets. Even floating-rate funds, sold as a defense against rising interest rates sometimes proved to be less effective than expected. Here is how PTY compares against PennantPark Floating Rate Capital ( PFLT ), a BDC, and the Nuveen Floating Rate Income Fund ( JFR ), a CEF currently at a 9% discount. I chose to show results from 1/1/2022 onward. Both funds did perform better than PTY.

Looking at the premium/discount chart for PTY, the little change there does not account for the underperformance.

Two other PIMCO CEF possibilities

Looking just at 10-year CAGRs and the current premium/discounts, these two CEFs might provide better entry points at this time and as possible swaps for investors sitting on a tax loss with their PTY holdings. I included PTY for comparison purposes. The other CEFs are:

• PIMCO Dynamic Income Fund ( PDI )
• PIMCO Income Strategy Fund II ( PFN )

The next chart shows CAGR and risk data.

Based on past results and the smallest premium, PDI looks like the CEF to consider amongst these three but PIMCO has seven other non-muni CEFs to pick from.

Final thought

For investors looking to add to their PIMCO fixed income allocation, PDI or PFN would be my choices as their premiums are very low and have comparable yields and returns. PTY with a tax loss that can be claimed might consider doing an exchange for one of those other CEFs.

For further details see: