A leading player in the global multi-market / multi-sector fixed-income securities space, the PIMCO Dynamic Income Fund (PDI) has been through a rough couple of months, with a year-to-date pullback of over 24%, notes Todd Shaver, editor of Bull Market Report.
The fund hasn’t been immune to the Fed’s hawkish policy, coupled with the growing global macro uncertainties that resulted in an unprecedented outflow from the bond market in recent months.
With the aim of generating current income, while preserving capital for investors, the fund invests in a diversified basket of fixed income securities. This includes 25% of assets allocated to privately issued mortgage-backed securities and the rest composed of debt obligations, high-yield corporate bonds, and fixed income derivatives, diversified across asset classes, credit qualities, and maturities.
As a result of the recent selloff, and the worst bond market in decades, the fund currently provides a mouthwatering yield of nearly 13.4%, all the while trading at just a 5% premium to net asset value (NAV). This is a rarity for a fund that has long traded at an average of at least 10% to 15% premium to NAV, making this the perfect value-creation opportunity for investors looking to average down.
Unlike Treasury securities or muni bonds, this fund is more suited to investors who are willing to take risks in pursuit of higher yields and capital appreciation. Similarly, the NAV will continue to remain under pressure during a rate hike cycle, and the fund’s holdings may not be as secure as a muni bond when it comes to a broad-based recession, given its exposure to corporate credit.
Credit market cycles, during 2009, 2011, 2016, and 2020 in the midst of the pandemic have provided investors with tremendous value creation opportunities. The recent selloff has created another such opportune point of entry, especially with the Fund being de-risked to a great extent, and with limited downsides, irrespective of any macro storms and headwinds in the coming quarters.
