PGP: Premium Comes Down, Making It A More Interesting Idea

seekingalpha06-20

simoncarter/iStock via Getty Images Written by Nick Ackerman, co-produced by Stanford Chemist. In our prior coverage of PIMCO Global StocksPLUS & Income Fund (NYSE:PGP), we compared the fund against ...

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In our prior coverage of PIMCO Global StocksPLUS & Income Fund (NYSE:PGP), we compared the fund against ...</p>\n\n<a href=\"https://seekingalpha.com/article/4700139-pgp-premium-comes-down-making-it-a-more-interesting-idea\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>PGP: Premium Comes Down, Making It A More Interesting Idea</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPGP: Premium Comes Down, Making It A More Interesting Idea\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-20 21:22 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4700139-pgp-premium-comes-down-making-it-a-more-interesting-idea><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>simoncarter/iStock via Getty Images Written by Nick Ackerman, co-produced by Stanford Chemist. In our prior coverage of PIMCO Global StocksPLUS & Income Fund (NYSE:PGP), we compared the fund against ...</p>\n\n<a href=\"https://seekingalpha.com/article/4700139-pgp-premium-comes-down-making-it-a-more-interesting-idea\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"GLO","symbol_name":"Clough Global Opportunities Fund","start_time":0,"source_url":"https://seekingalpha.com/article/4700139-pgp-premium-comes-down-making-it-a-more-interesting-idea","article_id":"2444564217","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1315471451/image_1315471451.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2444564217","pubTimestamp":1718889746,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"simoncarter/iStock via Getty Images Written by Nick Ackerman, co-produced by Stanford Chemist. In our prior coverage of PIMCO Global StocksPLUS & Income Fund (NYSE:PGP), we compared the fund against C","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"GLO":"Clough Global Opportunities Fund","PGP":"PIMCO全球StocksPLUS收益基金","ETG":"Eaton Vance Tax-Advantaged Globa"},"translate_title":"PGP：溢价下降，使其成为一个更有趣的想法","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ETG":1,"GLO":1,"PGP":1},"content_text":"simoncarter/iStock via Getty Images Written by Nick Ackerman, co-produced by Stanford Chemist. In our prior coverage of PIMCO Global StocksPLUS & Income Fund (NYSE:PGP), we compared the fund against Clough Global Opportunities (GLO). I noted that PGP was looking like a better bet earlier in 2022, but in our prior update in early 2023, that swap played out. I also believed that GLO looked like a better opportunity at the time. Since that update, PGP has performed fairly respectably but GLO did outperform. PGP's premium has also come down some since our prior update, and it has actually slipped to a slight discount. PGP Basics  1-Year Z-score: 0.45 Discount/Premium: -0.54% Distribution Yield: 10.81% Expense Ratio: 1.45% Leverage: 18.09% Managed Assets: $103 million Structure: Perpetual  The objective of PGP is to \"seek total return comprised of current income, current gains and long-term capital appreciation.\" They attempt to achieve this through an \"innovative StocksPLUS approach, pioneered by PIMCO...\" They will \"build a global equity and debt portfolio by investing at least 80% of the fund's net assets in a combination of securities and instruments that provide exposure to stocks and/or produce income.\" Essentially, this fund takes the multi-sector fixed-income fund approach like many of the other PIMCO closed-end fund offerings, then utilizes derivatives for their equity exposure. Primarily, long futures contracts are what the fund will be using to gain that effective equity exposure. However, the fund will also employ options, both short and long, as well as short futures contracts. The short futures contracts and interest rate swaps help hedge the fund, using those to help manage interest rate sensitivity and, therefore duration of the portfolio. The fund is leveraged, which is a common staple of most PIMCO funds as well. However, at this moment, the fund is employing a rather modest amount of leverage. It is down from the nearly 40% effective leverage ratio previously. Including the leverage expenses, the fund's total expense ratio comes to 3.8% as of their last semi-annual report. Performance - Lagging Results But Potentially Brighter Future Looking back to our prior coverage, where I was leaning toward GLO being the better opportunity, we see that GLO was able to deliver superior returns on a total share and NAV return basis. Ycharts The correlation between the total NAV returns is what makes these funds interesting swap partners, though they aren't a perfect pair. As we can see, the total NAV returns have diverged a bit more recently, and they also had during last October's market correction. Further, in the prior piece, I also noted that while I suspected GLO was more attractive than PGP at the time, an investor may just be better off with something more vanilla like Eaton Vance Tax-Advantaged Global Dividend Income Fund (ETG). PGP and GLO both add a bit more complexity to their portfolios, but in the end, more complex doesn't always mean better. Which ETG ended up burying both funds on a total share and NAV return basis. Ycharts For a long-term perspective, we can look at the last decade of performance of these three. We can see that PGP and ETG, on a total NAV return basis, actually are the funds that tend to show a closer relationship than GLO. GLO was a significant underperformer after rallying with the other two funds out of the Covid crash. Ycharts What might be worth noting more is just how poor the total share price returns for PGP actually were. This was simply because the fund had shown an extreme premium at one point, but today, it is at a much more digestible level. It isn't guaranteed that PGP doesn't eventually slip to trading at a deeper discount, but the chances of having such poor performance relative to the fund's total NAV return in the next decade are much more minimal. In other words, I don't think we will see such poor total share price results because the fund isn't going to be coming down from an 80-100% premium. Data by YCharts For what it's worth, GLO continues to trade at a deep and historically attractive discount as well. I continue to hold it in my speculative portfolio bucket. Distribution - Looking Attractive This is a CEF and a PIMCO one at that; therefore, investors' main driver for investing in the fund is going to be the relatively higher distribution rates that these funds can deliver. PIMCO tends to have a history of delivering even relatively higher distributions and not cutting for long periods of time. That doesn't mean that they shouldn't cut their distributions; they just end up putting the cuts off for longer. When PGP was trading at those euphoric premiums, this was the case as the fund held steady at an extremely high distribution rate. The catalyst for seeing that premium come down comes pretty clearly with a direct correlation of a series of cuts through the 2016-2020 period. PGP Distribution History (CEFConnect) Across the board, PIMCO funds were showing rather poor coverage but fortunately, that's been turning around a bit with the latest UNII report provided. Given the various derivatives employed by these funds, some shortfall isn't even bad because of the potential gains they can make from those instruments. I would even suggest that perhaps PGP's chances for capital gains are a bit better relative to its peers, which makes the fund's latest distribution coverage rather strong despite being below 100% NII 3-month rolling coverage. PIMCO CEF UNII Report (PIMCO (highlights from author)) We can see that play out in the fund's last semi-annual report as well. In that report, we can see that while some of their financial derivative instruments had realized losses, the gains on their others came out with a net realized gain overall from derivatives. PGP Realized/Unrealized Gains/Losses (PIMCO (highlights from author)) For tax purposes, the fund has seen its distribution primarily classified as ordinary income. That would make it more appropriate for a tax-sheltered account. PGP's Portfolio Given the high flexibility and hybrid approach of PGP, it can create a fund with significant diversification. It could essentially be a one-stop-shop type of fund, perhaps adding in another one or two other investment funds for some manager diversification. However, it should also be noted that the fund comes with an incredibly high turnover rate, which means you may not know exactly how they are positioned from quarter to quarter. As is the case with most CEFs, they don't necessarily have the most transparent holding reports in terms of seeing regularly what each individual holding is. With a 282% turnover for a six-month period and an average turnover rate of 427% for the prior five years, there could be a lot of changes going on underneath. As of the latest reporting, the fund's largest exposure was to mortgages. That's probably not an area where most investors want to be if they believe that we are in for an economic slowdown or recession; however, the largest exposure within the mortgage sleeve is to agency MBS. Those are going to be much safer being backed by the government-sponsored enterprises, Fannie Mae, Freddie Mac and/or Ginnie Mae. That sleeve contributes most to the fund's duration, which comes to 3.48 years. PGP Asset Allocation (PIMCO) That agency MBS allocation is up from the ~13% weighting the fund was carrying previously. Further, the fund's high-yield credit exposure has also come down some from the over 17% weight it had previously. The fund is operating with a more modest amount of leverage, and the purchased puts and writing calls on the S&P 500 that the fund also utilizes can help the fund play defensive. Additionally, as the portfolio has seen a slight shift into relatively safer securities agency MBS and a bit of a reduction in high-yield credit, it would seem that the fund is safer than it was previously. I wouldn't necessarily call it a safe fund, but safer than it had been Conclusion PGP provides investors exposure to a portfolio that is much like PIMCO's usual multi-sector fixed-income fund approach. However, they then take this a step further through derivatives to get the \"StocksPLUS\" portion of the portfolio, where the fund turns into more of a hybrid fund. The premium is down from the levels it was previously, trading at near parity with its NAV per share at a slight discount. It may never reach those premium heights again of its heyday-but the downside from further valuation compression at this point would appear to be limited. To see another similar move to when the fund traded at an 80-100% premium, would have to see the fund's current share price get cut in half and start trading at around a 50% discount. That isn't impossible, but it is improbable outside of a black swan event. The share price could be chopped in half, but it would likely require the fund's NAV to also fall quite precipitously, rather than seeing the discount open up to such depths.  Editor's Note: This article covers one or more microcap stocks. 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