PCN: A review of this PIMCO CEF multi-sector debt (NYSE: PCN)

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

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Introduction

Effective return of US BBB companies
Data by YCharts

Most experienced bond investors know PIMCO as a major player in debt CEF management, with a total of 19 entries, five of which they classify as enterprise funds, as opposed to multi-sector or municipally focused funds. Despite holding assets other than corporate debt, the PIMCO Business Strategy and Income Fund (New York Stock Exchange: PCN) is listed under this tag. As the chart above shows, the recent interest rate environment has not been favorable to fixed income assets.

PIMCO Corporate & Income Strategy Fund Review

Seeking alpha describes this CEF as follows:

The investment seeks high current income with secondary objectives of capital preservation and appreciation. The fund invests at least 80% of its total assets in a combination of corporate debt securities of various maturities, other corporate income-producing securities and income-producing securities of unincorporated issuers. It normally invests at least 25% of its total assets in corporate debt securities and other corporate income-producing securities. The fund invests up to 25% of its total assets (measured at the time of investment) in securities not denominated in US dollars. PCN started in 2001. Benchmark: ICE BofA US HY TR USD.

Source: PCN (Seeking Alpha)

PIMCO adds these statements explaining its investment strategy:

Employing a dynamic asset allocation strategy that emphasizes duration management, credit quality analysis, risk management techniques and broad diversification across issuers, industries and sectors , the multi-sector fund seeks high current income, with a secondary objective of capital preservation and appreciation.

The portfolio manager attempts to identify investments that provide high current income through fundamental research, based on independent credit analysis and proprietary analytical tools, and also uses a variety of techniques designed to manage the risk and minimize exposure to issues that are more likely to default or otherwise. depreciate over time.

Source: NCP (PIMCO)

PCN has $520 million in assets and has a forward yield of 10.5%. PIMCO charges 115 basis points of fees, broken down as follows:

  • Management fees: 81bps
  • Other costs: 4 basis points
  • Leverage expenses: 30 basis points

Current leverage is around 39%, funded primarily by reverse repurchase agreements (33.6%), with equal amounts of preferred stock and credit default swaps (2.6% each). ).

Asset review

The following chart shows why I first wondered that PIMCO classifies PCN as enterprise and not multi-industry. My calculation shows that about 25% of the portfolio is made up of non-corporate type instruments, so corporate debt is the driver of the portfolio, which probably determined the classification.

Sector allocation PCN CEF

PCN holdings (PIMCO)

Around 40% of the exposure to emerging markets is made up of sovereign debt, the rest being made up of companies. The portfolio is heavily weighted in lower quality assets. Some of the unrated securities could be investment grade, but my data sources did not show individual ratings to gauge this possibility.

PCN Ranking

PCN (CEF Connect)

PCN has a duration of 3.6 years and an average maturity of 8.9 years, with the following maturity allocations:

PCN maturity

LCN maturity (PIMCO)

With 24.3% of the portfolio maturing over the next three years, with half next year, PCN has the opportunity to take on new debt at more favorable coupons than those retiring. While the current average coupon is 5.6%, the WAC for assets maturing until 2025 is closer to 6%. This factor and the less than 4-year duration help protect the net asset value of the CEF if rates continue to rise over the next two years. Currently, the average bond price is $90.72.

Corporate debt (bonds/loans) is very well distributed across industries, with no one dominating the list.

Sectors of the PIMCO Corporate&Income Strategy Fund

Industries (PIMCO)

Based on market value, the portfolio is 80% US-based, with the UK, Brazil, Luxembourg and Italy accounting for most foreign holdings. PCN trades currency futures to minimize the effect of currency movements against the USD.

Main Holdings

Top PIMCO PCN Stocks

PIMCO; compiled by author

The Top 10 represents 29% of the portfolio’s weighting, out of 941 assets. Note that the larger stake does not pay that 15% coupon in cash, but in addition to bonds. In addition to assets for investment purposes, PCN holds 22 currency futures contracts, 22 interest rate swaps (on both sides) and more than 100 reverse repurchase agreements in support of leverage used.

Cast Review

PCN Breakdown

DVD PCN (Seeking Alpha)

The monthly payout has been at $0.1125 for over ten years now, and no special payouts have occurred since late 2017. UNII report shows PCN increasing its coverage rate from previous levels of 6 and 12 months.

NCP Award

UNII xls (PIMCO)

Unlike CEFs from other managers, PIMCO CEFs show no tendency to use a managed distribution policy. I saw no indication that any of the payments required ROC funds.

Review of prices and net asset value

Price PCN and NAV
Data by YCharts

Since its inception, PCN is currently showing a price loss of around $2/share. Investors who reinvested their payouts experienced a CAGR of 9.5%, compared to just 5.4% for those who did not.

PCN premium/discount

CEF Connect

PCN is one of those PIMCO CEFs that trades above PAR most of the time. That said, the current premium of 11.91%, although down from over 30% recently, is still above the average for this fund.

Portfolio strategy

As I wrote this, the the wall street journal reported that commodity prices tended to decline at the end of the second quarter compared to the beginning of the quarter; the implication being that we could see lower than expected Fed hikes. If so, perhaps the damage to fixed income fund prices and net asset value will slow or even resume some of the declines seen since last fall. At times like this, a fund’s asset mix and duration/maturity allocations become more important, i.e., have we reached the point where fixed rates are better than floating rate debt and longer duration funds back where investors want to be? I never went beyond ECON 101 in college, so I won’t attempt to answer my own question, but here is a list of all the PIMCO enterprise and multi-industry CEFs to compare PCN to.

PCN vs other PIMCO funds

PIMCO; compiled by author

Despite my concern that the PCN premium is higher than 11%, PIMCO has other CEFs at even higher levels; only two are currently trading at a discount. One thing investors would want to check is what were the highest premium levels of each CEF and how low they went; Z-scores are useful for assessing this factor. The following table provides other useful data points for comparing funds.

PCN vs other PIMCO funds

Income Builder Hoya Capital

final thought

PCN Price Trend
Data by YCharts

Barring those who caught the bottom of COVID, PCN investors are likely sitting on a capital loss on this CEF. If held in a taxable account, one strategy would be to sell PCN and buy another PIMCO CEF to replace it. Five of the funds listed above have outperformed over the past five years; a good set to start his due diligence.

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