PCM: Buying After Distribution Cuts Should Be Done Carefully

2025-01-06 10:23:47 ET

Summary

• The PCM Fund aims for high current income by investing in agency-backed MBS, non-agency MBS, investment-grade and high-yield corporate debt, and commercial mortgage-backed securities.
• Historically, I avoided leveraged CEFs like PCM due to the unfavorable risk-reward profile during the Fed's rate hikes and yield curve inversion.
• My caution was justified as PCM's returns have been flat over the past 2.5 years, under-performing other risk assets.

Main Thesis & Background

The purpose of this article is to evaluate the PCM Fund ( PCM ) as an investment option at its current market price. This is a closed-end fund whose investment objective is "to seek high current income" and it does this by investing primarily in agency-backed MBS, non-agency MBS, investment grade corporate debt securities, high yield corporate debt securities, and commercial mortgage-backed securities.

I used to cover PCM - and PIMCO funds more broadly - during the low interest rate era. Once the Fed began to hike rates and the yield curve was inverted, I was generally turned off by leveraged CEF investing because the risk-reward profile was tilted towards too much risk. I was well-served by this caution and that includes my opinion with respect to PCM in particular. The fund's return has been essentially flat since I wrote about it 2 1/2 years ago, which is quite poor when we think about how other risk assets have done in that time:

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