Closed-End Funds that Consistently Bat Singles and Doubles

09/13/2019 5:00 am EST

Focus: FUNDS

John Freund

Income Specialist, Todd Shaver's Bull Market Report

PIMCO's Chief Investment Officer Dan Ivascyn recently pointed out that he is implementing a defensive strategy at the moment, given that any trade agreement — even a narrow one — will likely result in yield prices snapping back up, explains John Freund, income specialist and editor of's The High Yield Investor.

Despite its ‘nosebleed yields’ compared to the rest of the developed world, Ivascyn says the U.S. is still one of the best places to buy bonds.

PIMCO Dynamic Income Fund (PDI) invests in a portfolio of mostly non-agency mortgage-backed securities (MBS). Non-agency means the MBS aren’t backed by the federal government, making them a higher risk-to-reward proposition.

The fund has basically been flat since March, as investors remain tepid given the broader macro outlook. No one is going to go rushing into PIMCO at the moment. That said, there’s no reason to rush for the exits either.

The long-term outlook is strong, even if the short-term will be slightly bumpy. And in the meantime, we’re collecting our 8.3% annual yield, which provides us with a double-digit positive return for the year. So who’s complaining?

The stock is also trading at a premium of around 10% to its NAV. The average premium for the year has been 13%, so the stock is looking cheaper on that metric, even though it’s trading at a premium. Indeed, PIMCO has traded at a premium for nearly its entire existence.)

And last but not least, PIMCO is growing its undistributed net investment income (UNII), with a fiscal YTD coverage ratio of 110%, but the company has been covering by 125% over the past three months, so PIMCO is producing even more UNII than it was earlier in the year. So the dividend is well-covered.

Additionally, the company maintains one-and-a-half months of UNII in reserves, so even if UNII production slips, the company can safely cover the dividend while it re-jiggers its portfolio.

AllianzGI Equity and Convertible Income Fund (NIE), yielding 6.8%, is another closed-end fund in our portfolio. It had a strong 1Q19. Net assets grew 4% YoY, and the NAV grew 3%. The stock is trading at an 8% discount to its NAV, which is a very healthy discount given the tailwinds this company is riding.

The fund’s top holdings include prominent blue chip stock. Allianz utilizes two complex strategies — convertible holdings and covered calls — to produce greater returns and a higher overall dividend than simply purchasing the basket of stocks on one’s own would generate.

An investment in Allianz provides an investment into a nicely diversified cross-section of the U.S. economy. While some folks see a recession around the corner, we’re cautiously optimistic. That said, Allianz is a nice defensive play against the onset of a recession, since owning blue chips is a great way to mitigate potential losses should the market turn.

Plus, the stock produces a healthy 6.8% yield, so fixed income investors can get their fix here as well. Management has kept the dividend in place since the post-Great Recession cut, so we’re not concerned about a dividend slash any time soon.

Like PIMCO, Allianz has been basically flat for most of the year (that’s after the stock’s January burst out of the gate). We’re fine with that performance and happy to bank the 7% yield.

All told, PIMCO and Allianz won’t be our biggest winners this year (not even close), but they’re not supposed to be. These stocks are for hitting singles and doubles, not home runs. Right now we’re standing solidly on second base with both, which is exactly where we want to be.

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