PDO - PTY Vs. PDO: Consider The Switch To The Smaller Premium

2023-07-14 08:00:00 ET

Summary

• The PIMCO Corporate and Income Opportunity Fund, a popular CEF, has a premium near 30% and invests in fixed income markets globally.
• The PIMCO Dynamic Income Opportunities Fund invests almost the same but has a much lower premium of just 4%.
• Both CEFs are reviewed and compared. Due to the two being almost the same in factors and asset allocations, selling PTY to buy PDO should be considered, with a caveat.

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

Introduction

While I think I understand it somewhat, it still amazes me that investors are paying anywhere between $1.20-1.40 to own $1 of PIMCO CEFs when CEFs from other managers are selling for $.90 on the dollar and other PIMCO CEFs have reasonable premiums. Better performance can easily justify such a decision, like paying up to own a superior small car other than buying a Yugo (for you old enough to remember that car). While there are many to pick from, I chose one of the most popular PIMCO CEFs, the PIMCO Corporate and Income Opportunity Fund ( PTY ), where the premium is near 30% and the PIMCO Dynamic Income Opportunities Fund (PDO) , with a premium under 4%. The similarities in their portfolios leads me to say Sell PTY; Buy PDO.

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. The Fund seeks to achieve its investment objective by utilizing a dynamic asset allocation strategy among multiple fixed income sectors in the global credit markets, including corporate debt, mortgage-related and other asset-backed securities, government and sovereign debt, taxable municipal bonds and other fixed-, variable- and floating-rate income-producing securities of U.S. and foreign issuers, including emerging market issuers. PTY started in 2002 and benchmarks itself against the ICE BofA US High Yield TR USD.

Source: seekingalpha.com PTY

PTY has $1.5b in AUM and has 120bps in fees. The Forward yield is 10.1%. The 32% leverage ratio is funded via different assets.

The leverage is costing 43bps, which is actually lower than a year ago despite interests rate climbing.

Neither PTY nor PDO invest based on what is the same benchmark, but understanding it provides insight into their strategy. Here is brief index description.

ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.

Source: indices.ice.com H0A0 index

Here is some current index data.

PTY holdings review

Industry exposure is well diversified, with the Top 3 only accounting for just over 20%.

Looking at sectors, we also see nice diversity. DWE stands for Duration-Weighted-Exposure and is the percentage weight of each sector's contribution to the overall duration of the fund.

The Maturity schedule has PTY concentrated at the short end of the market.

About 25% of the portfolio is in non-US issued assets. PIMCO did not provide ratings data and the site that did had older data, though I doubt it changes much.

PIMCO's most recent holdings data dates back to March, Seeking Alpha says what's next is from the end of April.

PTY distributions review

With other CEFs cutting payouts, sometimes due to higher leveraging costs, PTY has paid $.1188 for the last two years, with the last cut coming in September of 2021. That said, its UNII data screams "cut"! The PTY coverage ratios are the lowest for any taxable PIMCO CEF.

Tax documents show for the first half of 2021, $.0477 of each payment came from ROC. I did not see that PTY using a Managed Distribution Plan as some CEFs do.

PTY price/NAV review

Going back to inception, PTY seldom trades at a discount and currently has a premium of 32.8%!

PTY's Z-scores indicate that level of premium is high even for CEF that most times trades with a 10+% premium.

PIMCO Dynamic Income Opportunities Fund review

Seeking Alpha describes this CEF as:

The Fund seeks to achieve its investment objectives by utilizing a dynamic asset allocation strategy among multiple fixed income sectors in the global credit markets, including corporate debt, mortgage-related and other asset-backed instruments, government and sovereign debt, taxable municipal bonds, and other fixed-, variable- and floating-rate income-producing securities of U.S. and foreign issuers, including emerging market issuers. Benchmark: ICE BofA US High Yield TR USD. PDO started in 2021.

Source: seekingalpha.com PDO

PDO has $1.5b in AUM and list the fees at a whomping 279bps, which differs from what Seeking Alpha lists. The management fee is closed to PTY's; not sure why the Other Expenses is so much higher than other PIMCO CEFs. PDO does fund their higher leverage ratio differently which could explain some of the fee difference.

The Forward Yield is 11.69%.

PDO holdings review

Like PTY, no industry dominates the portfolio.

PDO holds more mortgages and less HY Credit than PTY does; most other sector weights are close.

Both CEFs have a large percent maturing in the next year; hopefully allowing each CEF to raise their weighted average coupon with interest rates being where they are.

The credit rating allocation mirrors PTY.

Despite both fund holding 000's of assets, both Top 10 lists comprise a large portion of the entire portfolio by weight. There is also a big overlap between the two lists.

PDO distribution review

The monthly payout is $.1279 since it increased last summer. UNII data definitely favors PDO over PTY.

PDO price/NAV review

The short history limits what can be deciphered with great reliability but unlike PTY, PDO has seen deeper discounts and smaller premium peaks.

Comparing CEFs

PDO is less than three years old, so again, that limits what this tells us.

Portfolio strategy

Due to PTY's 15+% YTD performance advantage, the long-term results favor PTY at this moment, but that could also mean investors will wake up and take those profits, driving down PTY's price relative to PDO's, where the premium is almost 90% smaller. While PTY has shown its ability to trade at large premiums, a look at the chart does show at least three times when that premium took a quick, deep correction, the last time being about two years ago.

For those holding PTY in a tax-shelter account, selling it and reinvesting those funds into PDO should be considered since the two CEFs hold roughly the same assets. One view is buying PDO is like getting PTY on sale! For those showing a loss on their PTY holdings in a taxable account, a switch into PDO within 30 days probably would run afoul of the IRS "wash rule". You might want to wait or find a similar fund from another manager that sells at a discount. Nuveen has some but the asset allocations seem to differ greatly.

The similarities in their portfolios leads me to say Sell PTY; Buy PDO.

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