CEF discounts and premia - buying and selling

[richardsok]

Changed my mind.

I have clear memory of once watching PDI when it was yielding 8.5 - 9% or so and thinking, "If it ever gets to the point where it's earning and yielding 10%, I'll buy it."

Well, this morning I see it slipped another couple of cents and is now distributing just a sliver under 13% YOC, all fully earned, of course. Broke all my technical rules and bought an opening block of it in the ROTH, vowing to be a born-again buy-and-hold investor with this puppy. Will buy again if price remains in this neighborhood or lower and next week's coverage numbers hold.

Realistically, I was holding big cash in the Roth for just such an opportunity. Unless I'm very wrong, this might be it. At this price, can't imagine a Roth-worthy buy with this kind of long term risk/reward.   Certainly it could drift lower, but I can't picture investors seeing PDI yielding a fully earned 14% or so and not leaping on it.

We'll see.

[retiredat48]

I keep checking my brokerage statements to verify that PDI continues to make monthly dividend payments. Yep, they still do!

I keep struggling to find "what am I missing?" in PDI that has it going down; but can't come up with a flaw other than these CEFs tend to sell with the stock market moves. Like a huge bear market in stocks means many CEFs also decline huge...then rebound very fast. Capecod recently posted that the PDI type funds (recently) went down 1-2% while the NAVs only declined .5-.66%, meaning the premium or discount was being sold by investors.

R48

[ECE Prof]

Sept 14, 2022 19:44:57 GMT retiredat48 said:

I keep checking my brokerage statements to verify that PDI continues to make monthly dividend payments. Yep, they still do!

I keep struggling to find "what am I missing?" in PDI that has it going down; but can't come up with a flaw other than these CEFs tend to sell with the stock market moves. Like a huge bear market in stocks means many CEFs also decline huge...then rebound very fast. Capecod recently posted that the PDI type funds (recently) went down 1-2% while the NAVs only declined .5-.66%, meaning the premium or discount was being sold by investors.

R48

PDi is going at a premium at 4.17% as of yesterday. There has been some selling this month because of the "risks" mentioned in SA articles. It was going at a premium of 10% last month. I will buy more, if the premium drops. In spite of the market drop, my income went up by 25%.

[chang]

I’ll look at CEFs when the discount gets to > 10-15%, otherwise not. Regarding FI CEFs, discounts inflate yields while premiums compress them. I see no point in owning FI (or any other) CEFs at a premium. Sorry for OT — happy to move this to another thread if started.

[retiredat48]

Sept 14, 2022 20:14:43 GMT chang said:

I’ll look at CEFs when the discount gets to > 10-15%, otherwise not. Regarding FI CEFs, discounts inflate yields while premiums compress them. I see no point in owning FI (or any other) CEFs at a premium. Sorry for OT — happy to move this to another thread if started.

I wouldn't make this iron-clad rule.

PDI has gone to a 30%+ premium at times.

Thus, if it gets to a 3% premium,may be a great buy time.

Premiums also do not have a way to reflect special end-of-year distributions.  PDI was notable in this regard...a couple extra percent dividend payout in many Decembers.  Investors paid a premium to capture this.  Surprisingly PDO (note PDO) had a December year end bonus special payment in its first year of operations.)  At this time it looks like PDI may have same come December.

The premiums also basically reflect the strength/commitment of the investors holding the fund. 

Final point.  If you buy PDI at a 3% discount, and it goes up to an eventual 5% premium, do you sell??  Each day owning a fund is equivalent to saying you would buy at that point.  If you never buy at a premium, you should never own at a premium.  I don't think selling at a 5% premium is prudent. And those who did sell, missed out on PDI going to and staying at a 30+% premium for a long time.

R48

[chang]

I moved the first 5 posts here from BSW to a new thread. It's a good topic, and would probably continue to grow inside the BSW thread. It deserves its own thread.

retiredat48 : Iron-clad rule? Not exactly. But close. Yes, I have generally sold at premia. Best example is munis after the Whitney bottom. One of my better investments was buying muni CEFs at the Whitney bottom. All at discounts of 10-20%. I sold them off one by one as they went to premia. I remember the last one to go was PML. I didn't sell at the top, to be sure; I might have been early or late. But looking back, the "trade" (if you can call a multiple-year hold that) was fairly successful.

Let's do the math. Again, discounts inflate yields while premiums compress them. If a CEF portfolio yields a true 5% but trades at a 10% discount, you're getting a yield of 5.55% (5/0.9). If it trades at a 10% premium, you're getting a yield of 4.55% (5/1.1).

So owning a CEF at a premium is just throwing away yield. I would rather buy the underlying securities. Maybe you can't find an equivalent OEF -- maybe the only way to own those securities is to own the CEF. If so..... well, I still wouldn't be tempted.

Bottom line: I'll buy CEFs at > 10% discount; otherwise, I will go to equivalent OEFs.

[steelpony10]

retiredat48 ,

         Ha. Ha. I don’t see any amateur investors struggling with individual stocks and I saw they’re second only to cryptocurrency in risk. Capecod is a really knowledgeable CEF trader. We buy and hold an automatic money machine instead. Another slant on CEF’s.

          CEF’s are bond funds with a wrap around layer, some borrow money to goose distributions. Individual companies and municipalities borrow money, They are all run by professional managers, not me. PIMCO is tops in this area. There’s usually have high premiums because they are the best. Others pay out a ton of money monthly. Check the AUM, greed at it’s best. All CEF’s are on sale now with everything else. The other option is to invest in equities and wait for any unknown reward sometime in the future. So money now above your personal inflation rate if you choose or door #2.

           We’ve got most of our money back by now since we invested about 60% in our CEF holdings during the bank crisis, 72/8-10%. Most have read about ROC. By now I’m mostly receiving someone else’s ROC along with 8-10% distributions. ROC is tax free income if received in a taxable account.

            I haven’t come across what I’m missing either going back to 9/11 with my mom’s account. I did miss, wars, corrections, trade wars, Covid, inflation, rate hikes, T, social unrest, financial gypsies with their crystal ball forecasts, tops and bottoms of markets and a slew of unknown future events affecting equity returns though.

[richardsok]

I obviously agree with R48, as I just bought an opening position recently. In looking at at PDI's one year chart I am encouraged that it dropped to these levels only recently in mid June and then recovered.... people reaching for the compelling yield? Possibly. This market doesn't give you second chances very often, but PDI's return to recent lows may be one of them. It certainly hasn't dropped lower than previous support -- yet. Of course that doesn't explain why PDI had its long Jan-to-June slide in the first place. I'm as puzzled as anyone, if not just another example of market dysfunction & friction -- or just general going with the bearish flow.

Pony -- like many others, I'm indebted to Capecod. Until I began reading his posts I didn't know Pimco from a palindrome. That said, I'm not a total fan. Didn't I recently read he had capitulated and sold most of his Pimco funds just the other week? If so, he must have held on to his CEFs and his beliefs WAY too long and must have paid a heavy price for his convictions. IF the report is correct, he must have sold right near the bottom. My impression of him, especially now that we sight him so rarely these days, is that he has terrific intelligence, a thorough knowledge of the lingo making him sound (to us) as an authority to be emulated -- but too much self confidence for his own good.

I don't care how deep your security analysis skills run, you never EVER fight the tape.

[Deleted]

A common situation for equity CEFs is to trade at discounts. With bondish CEFs, they may or may not trade at discounts. In any case, there is more to consider than just discounts. The same holds true for distributions; although that is what attracts buyers and holders.

[Deleted]

I follow Dick's posts on the Fidelity forum. No problem with Dick other than his remarks that there was no inflation based on what he saw happening on Cape Cod. He is a good CEF and bond analyst. He sells at a whiff of potential loss. I buy and hold based on my own analysis, but consider general points he has made over the years.

[steelpony10]

richardsok ,

          Your correct of course. I was just repeating others opinion of Capecod as a trader. Trading to not my interest.

           I added all I was going to add for awhile to our CEF’s about 2-3 wks before the summer rally. If this is a 5-10 year lull like 1999-2010 I’ll have another 1 or 2 opportuinties.

[ECE Prof]

"Your correct of course. I was just repeating others opinion of Capecod as a trader. Trading to not my interest."

+1. I am not a trader, either. My current personal yield is above 12%.

I did not buy PDI, but I ended up with PDI due to the merger. My original investment was in PCI, when I had a CG and had recovered a lot of money during the previous three years. Besides, I bought with good discounts, sometimes with 25-30% discount during the pandemic. I will probably recover my money in another 2-3 years. Then, what?

Think about it. It is working like an excellent annuity without having to surrender your cash. In fact, I had automatic reinvestment in the first year. My share count went up by 10%. It is a splendid growth rate. It was fine with such a growth rate. So, I bought another 25% shares. Now, I have 80% more shares than my original purchases. I have used my PDI shares to buy other ECC and CLM shares. In fact, I have used the distributions to buy equity shares of VGT, VTI, and VOO also because I consider the distributions as my annuity income.

[retiredat48]

chang ,...who partly posted: "So owning a CEF at a premium is just throwing away yield. I would rather buy the underlying securities. Maybe you can't find an equivalent OEF -- maybe the only way to own those securities is to own the CEF. If so..... well, I still wouldn't be tempted."

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First, what underlying securities for PDI? This is a difficult task to replicate.

Second, and most importantly, you can't duplicate what PIMCO does. It is far more than just owning underlying securities. PIMCO does deriviatives, borrowings, shorts, swaps...etc. Even the most experienced investors (like capecod, who traded bonds for a living), can't fully understand or get under the hood to decifer all of it.

What is important is generally, they manage to come out ahead each year, in positive UNNI, earning more than the distribution, and perhaps a special distribution year-end annually.

Capecod just posted: "Looks like the new PIMCO UNII report is out. UNII grew by a few cents for all taxable except PGP. PDO and PDI UNII both approaching a dollar. I'm hoping they bury some of that UNII in unrealized profits rather than declaring huge year end extras ---- a buck each could upset tax planning."

Regards, Dick

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Exactly...except I hope they do pay it out, as it is not taxable to me!

Today's small premium on price goes to buy the extra income, that will be paid out someday.

I can't begin to replicate what PIMCO does...

R48

[retiredat48]

I don't want to dismiss that paying a premium or discount is not important...it is. In fact, many posters here, including me, were accumulating PCI at zero premiums, while PDI went to 30% plus...for very comparable distribution yields.

However it came to pass that PIMCO merged three funds, including PCI into one combined fund, PDI. Personally, I was disappointed PIMCO did not protect the PCI folks better...got trapped. But that is a one-time occurrence that is over.

So as one should do every day, you assess an investment, today, as to whether or not it adds value and is worth keeping. I'm currently holding...and I use the distributions to live on.  The ice cream cones don't know whether the money is from leveraged investments, now at a slight premium...or not!

R48

[Deleted]

PIMCO recently bought a considerable amount of junk that BA and other banks were unloading, which may have reduced PDI's NAV but boosted its UNII. I read Dick's newest thread with his cherry-picked inflation readings, and he blasted the only dissenting poster. 

[ECE Prof]

When the Ukraine war started, there was a rumor that PIMCO's bond investments in Russia are in danger, and there was a selling. Guess what? PIMCO had insurance on those bonds, and Russia paid for those bonds. PIMCO did not lose anything. I do not know if they still have Russian bonds, and if they have, it is just fine with me. I recall the Argentine Bond crisis. PCI went on sale with 10% discount. That is the time I started buying PCI in thousands of shares, probably something like 5000 shares. There are always rumors. But, I came to believe in those 3 or 4 managers of PIMCO after every crisis.

[chang]

R48- yes I agree that PIMCO does things that no amateur investor can duplicate. But they do some of those things in their OEFs, too. And the bottom line — for me — is that CEFs’ performance hasn’t been that great. I’m sticking with my 10-15% discount as a criterion to get my attention.

[retiredat48]

Sept 15, 2022 20:04:22 GMT chang said:

R48- yes I agree that PIMCO does things that no amateur investor can duplicate. But they do some of those things in their OEFs, too. And the bottom line — for me — is that CEFs’ performance hasn’t been that great. I’m sticking with my 10-15% discount as a criterion to get my attention.

OK...but it is only about once a decade that PIMCO CEFs go to these 10-15%discount levels...and lasts for about a few days.  Don't get stuck unavailable traveling!   Do electrons flow all the way up to your new house yet, up there in no-mans land?

R48