rumi
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Posts: 40
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Post by rumi on Oct 22, 2022 19:45:25 GMT
PIMCO CEFs use leverage. This leverage is capped at 50%. In simple terms: a funds leverage ratio may never exceed 50%. So when NAVs decline, PIMCO is forced to sell their bond holdings at a loss. Which is sadenning because a rational investor would want to buy, and not sell bonds when they're priced lower.
A quick example: A PIMCO fund borrows $50K and buys $100K worth of bonds, which gives it 50% leverage. Next year, the value of the bonds have declined to $80K. PIMCO is forced to sell $10K worth of bonds in order to get the leverage ratio back to 50%.
If my assesment is correct, it might be dangerous to buy CEFs that have a leverage ratio that is close to 50%, because it would mean that bonds are sold at a loss. Am I right to think like this?
Here are a few popular PIMCO CEFs and their current leverage ratios: PCN: 37% PCM: 49% PAXS: 48% PDI: 48% PTY: 42% PDO: 49%
PCN and PTY (37% and 42%) still have some room for NAVs to decline without being forced to sell, while others funds are very close to 50% and migh be forced to sell bonds any day. Selling bonds at the worst possible time would erode shareholder value, and strip the fund of valuable income sources. Althoug UNII's still look remarkably good, this is a small worry I have.
Feel free to add your thoughts, or to correct anything I got wrong.
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Post by uncleharley on Oct 22, 2022 20:51:02 GMT
I shouldn't add my thoughts, but since you asked your quick example is an example of a PIMCO fund buying with 100% leverage, not 50%. You also fail to take into consideration that the PIMCO staff are professional traders that make their living in part by avoiding such situations. Can they fail??? Anything is possible, but the scenario you articulate is highly improbable given PIMCOs track record. Anyway, if the products they have do not fit your needs or risk tolerance, my only suggestion is that you do not buy them.
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Post by yogibearbull on Oct 22, 2022 20:51:56 GMT
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Post by ECE Prof on Oct 22, 2022 21:18:57 GMT
Irrespective of the opinions of others, I have added more shares recently. If the shoe does not fit, don't buy.
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Post by Chahta on Oct 22, 2022 21:21:37 GMT
Correct me if I am wrong, but since a CEF is "closed", any shares that are sold by investors are bought by other investors for the going price. The fund does not sell securities for redemptions.
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Post by yogibearbull on Oct 22, 2022 22:30:09 GMT
Chahta , I think that the OP is talking about changes in leverage simply from portfolio declines and that happened during the GFC 2008-09. If a CEF violates its max leverage, it is forced to sell to reduce leverage (forced deleveraging). These leverage changes are not from redemptions.
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Post by ECE Prof on Oct 23, 2022 1:21:16 GMT
Didn't PDI and PCI survive in 2008-2009? They did. So, I am sure that PIMCO professionals know all of these things. Amen to this leverage/deleverage. So, as I said before, if the shoe does not fit, do not buy it. Period.
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Post by bizman on Oct 23, 2022 1:21:57 GMT
One way to manage risk is through position sizing. For example, I include my holding of PDI in my equity allocation. PDI is currently slightly under 9% of said equity allocation, and about 5.5% of my overall portfolio. This represents my total holdings in CEFs. My current overall portfolio breakdown is about 62% equity, 38% cash.
I'd be very interested in others' percentages and/or limits in terms of risk management, and just how they think about CEFs as a part of their portfolios.
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Post by bizman on Oct 23, 2022 1:25:04 GMT
Didn't PDI and PCI survive in 2008-2009? They did. So, I am sure that PIMCO professionals know all of these things. Amen to this leverage/deleverage. So, as I said before, if the shoe does not fit, do not buy it. Period. I don't believe PCI or PDI existed during the GFC.
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Post by ECE Prof on Oct 23, 2022 1:28:06 GMT
One way to manage risk is through position sizing. For example, I include my holding of PDI in my equity allocation. PDI is currently slightly under 9% of said equity allocation, and about 5.5% of my overall portfolio. This represents my total holdings in CEFs. My current overall portfolio breakdown is about 62% equity, 38% cash. I'd be very interested in others' percentages and/or limits in terms of risk management, and just how they think about CEFs as a part of their portfolios. PDI and ECC combination was about 30% of my portfolio. I never regretted it. It has also ballooned to 40% some years back due to reinvestment of shares, and I have cut them a few times. Because of the reduction in the equities, it is back to 40%. I am not cutting back because these lay golden eggs every month. So, why kill the goose that lay golden eggs?
I have had a BDC, ARCC, which has 3 times the equity as leverage. There are lots of such investment vehicles, which are supercharged. People can find some here.
I had GLAD just a few months back. I was looking at GLAD last week, but the discount disappeared in one day. So, I did not buy.
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Post by newtecher on Oct 23, 2022 3:08:11 GMT
Some PIMCO CEFs did rather terribly in 2008-09. I remember PFL and PFN, which permanently lost about half of NAV. And there are certainly bad precedents for forced deleveraging in the CEF world. KMF is a non-PIMCO example I remember.
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Post by anitya on Oct 23, 2022 6:45:23 GMT
Didn't PDI and PCI survive in 2008-2009? They did. So, I am sure that PIMCO professionals know all of these things. Amen to this leverage/deleverage. So, as I said before, if the shoe does not fit, do not buy it. Period. Both these are post GFC creations and survived the 2013 taper tantrum. PTY, PCN, and PCM survived GFC. PFN and PFL pre and during GFC were by mandate bags of leveraged loans / floating rate loans which were mismanaged by a manager who no longer works there. I think after that experience PIMCO converted PFN and PFL into multi-sector widgets and I think now they no longer provide mono-line CEFs in the taxable space.
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Post by anitya on Oct 23, 2022 6:57:43 GMT
One way to manage risk is through position sizing. For example, I include my holding of PDI in my equity allocation. PDI is currently slightly under 9% of said equity allocation, and about 5.5% of my overall portfolio. This represents my total holdings in CEFs. My current overall portfolio breakdown is about 62% equity, 38% cash. I'd be very interested in others' percentages and/or limits in terms of risk management, and just how they think about CEFs as a part of their portfolios. I think you are asking about fixed income CEFs. I have not owned fixed income CEFs in any significant way in more than a year / year and half (I may have swing traded once or twice since then) and currently do not own any CEFs. I sold energy equity CEFs a couple of months ago. I treat Equity CEFs as more beta than equities and Equity CEFs are normally not part of my tool box because I can get leveraged equity exposure else where without having to deal with discounts. I owned fixed income CEFs (mostly PIMCO) for 8 years from 2013 and once I understood what they are I counted them as equity like beta.
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Post by yogibearbull on Oct 23, 2022 12:04:45 GMT
3-yr SD for PDI is 28, while for SP500 24. These are from Stock Rover (SR) that uses DAILY data rather than MONTHLY data used by M* and PV (monthly data causes lot of smoothing).
PDO and PAXS haven't been around for 3 yrs but SR still gives their SDs based on their shorter histories but those aren't comparable.
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Post by Fearchar on Oct 23, 2022 15:19:12 GMT
CEF's carry many different risks as do all other investments.
Leverage multiplies the risk but also multiplies the reward.
These CEF's invest in a number of different debt instruments. The prices of the debt is falling primarily because the FED is tightening monetary policy. That by itself, should not force the fund to liquidate.
With the tightening, the cost of leverage goes up. That could reduce the ability of the fund to produce income. However, since higher yielding debt is also available compared to last year, the fund may not have a problem.
I believe a more significant risk is that the rate of bankruptcies could increase as they typically do during a recession. However, we don't seem to be heading towards a recession as much as we are heading to a period of slower growth. The FED wants to break inflation without actually causing a recession. I'm fairly confident that they will ease policy if a real recession were to become obvious. Of course, I'm sure there are plenty of critics that will point out how poorly the FED has performed.
Also, 3 month rolling UNII coverage ratios for several PIMCO CEFs increased during the Sept report. Coverage ratios peaked for several CEFs in May/June, but may have stabilized. So, perhaps the risk of distribution cuts isn't all that great.
Only time will tell.
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Post by retiredat48 on Oct 23, 2022 15:44:13 GMT
FWIW, poster Capecod brought up, in another forum, that:
--PDI has approx 10% cash, currently. Can offset leverage ratio issues.
--PDI has lots of bonds maturing within a year; the rollover to higher rates expected.
I have not fact-checked these.
R48
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Post by Fearchar on Oct 23, 2022 18:21:53 GMT
According to Morningstar; PDI is:
Long Cash: 17.64% Short Cash: -79.31% Net Cash: -61.67%
FWIW
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Post by richardsok on Oct 23, 2022 18:25:49 GMT
FWIW, poster Capecod brought up, in another forum, that: --PDI has approx 10% cash, currently. Can offset leverage ratio issues. --PDI has lots of bonds maturing within a year; the rollover to higher rates expected. I have not fact-checked these. R48 I recently read similar data elsewhere, can't recall where, but nothing connected to CC. Intend to add to PDI.
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Post by Fearchar on Oct 23, 2022 18:31:56 GMT
Interesting; according to Morningstar; PDO is:
Long Cash: 17.56% Short Cash: -93.06% Net Cash: -75.51%
So, nearly the same Long Cash position as PDI, but more leverage.
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Post by richardsok on Oct 23, 2022 18:44:19 GMT
Interesting; according to Morningstar; PDO is: Long Cash: 17.56% Short Cash: -93.06% Net Cash: -75.51% So, nearly the same Long Cash position as PDI, but more leverage. Yes but I don't believe PDO has as many bonds maturing in the upcoming year as PDI. PDO is a much younger fund. In the end, we're dealing with essentially "black box" management -- very skilled managers to be sure -- but still tactically largely not understood. Unless the wheels come off the cart, both PDI and PDO are on track for very large EOY special distribs. PAXS also. To my mind, this knowledge should prevent any price collapse below their already extremely low levels at least until mid Dec.
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Post by Fearchar on Oct 23, 2022 21:51:18 GMT
I don't really know regarding the relative amount of bonds maturing the upcoming year. However, turnover according to Morningstar, as of 6/30/22:
PDI: 27% PDO: 47%
Sooo, by turnover it would appear that PDO has been doing more purchasing.
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Post by ECE Prof on Oct 23, 2022 22:26:34 GMT
I don't really know regarding the relative amount of bonds maturing the upcoming year. However, turnover according to Morningstar, as of 6/30/22: PDI: 27% PDO: 47% Sooo, by turnover it would appear that PDO has been doing more purchasing. I should also assume so because, the UNII keeps growing. CEFdata.com says (today) that UNII trend is "up" for PDI. Those managers know what they are doing. I am not worried even a small bit about my investment in PDI in spite of the fact that I am down by 15% - a lot lower than the QQQ and VOO.
All those "experts" of SA wrote negative stuff about PDI on leveraging and deleveraging, etc. However, it is still going on premium. Go, figure this one.
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Post by richardsok on Oct 24, 2022 1:40:29 GMT
I don't really know regarding the relative amount of bonds maturing the upcoming year. However, turnover according to Morningstar, as of 6/30/22: PDI: 27% PDO: 47% Sooo, by turnover it would appear that PDO has been doing more purchasing. That makes sense. PDO is a much younger fund and is probably still putting cash to work.
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Post by johnsmith on Oct 24, 2022 13:02:03 GMT
Anyone know how CC and other figured out: 1. Cash position of PDI. 2. How many bonds mature over the next year. I'd like to be able to learn to figure this stuff for myself. Also regarding leverage - I think CC or someone else said that PIMCO CEFs use Repo to leverage and to reduce leverage, they can just let the repo trades roll off and the leverage will automatically reduce. They don't absolutely have to sell off their assets. Also this was a interesting read regarding FX Swaps & Repo - which was enlightening as it made it clear to me why PIMCO uses Repo (they aren't limited by the assets, only by willing counterparties) journals.sagepub.com/doi/full/10.1177/0308518X221128302
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Post by johnsmith on Oct 24, 2022 13:28:38 GMT
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Deleted
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Post by Deleted on Oct 24, 2022 15:14:33 GMT
Anyone know how CC and other figured out: 1. Cash position of PDI. 2. How many bonds mature over the next year. I'd like to be able to learn to figure this stuff for myself. Also regarding leverage - I think CC or someone else said that PIMCO CEFs use Repo to leverage and to reduce leverage, they can just let the repo trades roll off and the leverage will automatically reduce. They don't absolutely have to sell off their assets. Also this was a interesting read regarding FX Swaps & Repo - which was enlightening as it made it clear to me why PIMCO uses Repo (they aren't limited by the assets, only by willing counterparties) journals.sagepub.com/doi/full/10.1177/0308518X221128302I am the one who mentioned PIMCO CEFs using Reverse Repos as Leverage. As far as Cash, it is difficult to tell, depending on how cash is defined, and taking into consideration long, short, and net. Fidelity has two consecutive portfolio entries for PDI Cash & Equiv.% 16.95 and 16.95. On pimco.com, Cash % Long 65.83, Short 141.17, and Net -75.34. These numbers may change daily and to an unknown extent.
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Post by johnsmith on Oct 24, 2022 17:21:29 GMT
I can't find this information on Pimco's site. I wonder how Fidelity is figuring out this information. Even looked at all the footnotes! LOL.
The only thing that comes close is footnote 7.
This is currently at Market Value : 4%
DWE : -5%
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Post by ECE Prof on Oct 24, 2022 17:50:57 GMT
Do we have to know all the fine prints about PIMCO CEFs? I do not need any of those details as long as you believe on the managers as an investor. In fact, I bought a few thousand shares of PCI, when people were selling PCI with big discounts during "Argentine Bond" crisis. Is it not enough about the distributions, UNII, premiums, and NAVs?
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rumi
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Posts: 40
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Post by rumi on Oct 24, 2022 20:20:56 GMT
Do we have to know all the fine prints about PIMCO CEFs? I do not need any of those details as long as you believe on the managers as an investor. In fact, I bought a few thousand shares of PCI, when people were selling PCI with big discounts during "Argentine Bond" crisis. Is it not enough about the distributions, UNII, premiums, and NAVs? Fair point. I think I just sleep a bit better understanding how things work under the hood. Unfortunately, I don't think I'll ever truly feel comfortable in my understanding of all the risks at play with PIMCO CEFs. But having some information beats not knowing and going by faith alone.
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Post by ECE Prof on Oct 24, 2022 21:02:29 GMT
Do we have to know all the fine prints about PIMCO CEFs? I do not need any of those details as long as you believe on the managers as an investor. In fact, I bought a few thousand shares of PCI, when people were selling PCI with big discounts during "Argentine Bond" crisis. Is it not enough about the distributions, UNII, premiums, and NAVs? Fair point. I think I just sleep a bit better understanding how things work under the hood. Unfortunately, I don't think I'll ever truly feel comfortable in my understanding of all the risks at play with PIMCO CEFs. But having some information beats not knowing and going by faith alone. Again, you are raising a good point. However, my experience with PIMCO has been very positive. Remember that my PDI investment has lost about 15% this year. I do not consider that loss as a loss because these shares were bought when PCI shares were merged. I bought the PCI shares even with 25-30% discount during the pandemic. So, I am happy now. The "-15%" is just a number for me. But, PIMCO has always paid me more than 10% (APR) on a monthly basis ever since I started back in 2017. My only regret now is this: I reinvested all those distributions in the equity shares of QQQ, VGT, and VOO and lost a lot there. If I had reinvested back in PCI (and PDI), my share count will be far more, and my income would have been growing at 1% per month. That is a phenomenal growth rate, well compared to the equity growth.
In fact, I have invested in the past until a few months ago in BDCs that use a lot more leverage than what PIMCO does. In one example, ARCC has a debt of 1.4-times its equity. It was 3 times last year, when its price was so low. I bought some shares as a trade and made some cash. I can give you many such examples. The worst leverage in your life was your own mortgage, when you borrowed 4-times (80:20) your investment and paid it back over 30 years. Imagine how much money you gave to your bank. A BDC, FSK, had a debt:equity ratio of 3.71:1 (just like the mortgage) last year at this time, when its price was teetering in the shallow waters. I bought, but I sold it back when FSK borrowed even more money. People should love OPM.
Anyway, I am happy that I am buying PDI shares cheap now, and my personal yield is close to 13%. That is good enough for me.
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