We pay attention to relative discounts and relative premiums, particularly relative discounts, suggests Steve Mauzy, a specialist in closed-end funds and editor of Dividend Confidential.
If the relative discount is greater than the historical average discount, a buy opportunity could be emerging. If the relative discount exceeds the historical average by a gaping margin, a buy opportunity has likely emerged.
We found another "Shadow Fund" trading at a high relative discount to net asset value (NAV). The margin is gaping. The PIMCO Global StocksPLUS & Income Fund (PGP) is that fund.
The Pimco fund’s shares trade at a 3.4% discount to the investments that populate its portfolio. The discount might appear trivial in isolation, but when compared to the historical average discount, it’s a big deal. The Pimco fund’s shares typically trade at a premium to NAV. The premium has been as high as 55% over the past three years.
PIMCO Global’s Historical Premium/Discount (Mostly Premium)
A higher starting yield is the upside to a lower share price and a gaping relative discount. The Pimco shares recently yielded 9.2%. Like most of our Shadow Fund recommendations, Pimco pays its high-yield distribution in monthly installments. (Bills arrive monthly. Isn’t it nice when your income does, too?)
I like the income. I also like the diversification benefit. The Pimco fund owns a diversified portfolio of stocks and bonds, with the portfolio tilted more to bonds. Most of the portfolio is allocated to stocks and bonds in the United States. Bonds in Europe, South America, and Asia further diversify the portfolio geographically.
The Pimco fund also overlays a strategy we don’t see in our other recommendations. The fund is leveraged roughly two-to-one. Leverage increases the risk, to be sure, but it also increases the income.
What’s more, the additional risk accepted for the additional return increases portfolio efficiency. The reason is that government bonds tend to be lowly or negatively correlated with stocks. One goes up, the other will go down (generally speaking), but when sentiment is bullish, both stocks and bonds will tend to rise together.
As to the relative value today, Pimco’s z-score further buttresses my buy recommendation. The z-score is a statistical measure of value. It tells you the value today compared to historical value.
The higher the z-score, the less appealing the value proposition. Here, we seek the negative. Our interest is piqued when we cross paths with a Shadow Fund (closed-end fund) that sports a z-score of -2 or greater. Pimco’s z-score is -3.2. That z-score screams “bargain!”
We expect to profit from the high-yield distribution Pimco pays today. We expect to profit tomorrow from a rising portfolio value (and share price) and a tightening of the share-price discount to NAV.
History has shown that buying when everyone is selling is frequently the opportune time to buy and profit from a closed-end fund. I expect the Pimco Global fund to adhere to form.
Suggested Action: Buy PIMCO Global StocksPLUS & Income Fund at market.