PTY & PFN: The Paradox Of Cash Appearing To Be Trash (NYSE:PFN)

The cycle never changes, only the players change. Every new player/investor becomes convinced that an asset class is doomed to extinction. Of course, if they all collectively believe and act on it, the end result is just that class is doomed. For best performance.

Cash is garbage. We heard that investors used that mantra to chase the growth and bond speculative bubbles for most of 2021. The two fed each other. What could go wrong with buying Shopify Inc. (SHOP) at 100x his sales?With a 1% discount rate, the answer would grow to that valuation by the late 2030s was. Investors who saw the folly of chasing that growth promise invested in the PIMCO Corporate & Income Opportunity Fund (New York Stock Exchange: PTY) and Pimco Income Strategy Fund II (New York Stock Exchange: PFN) at the time yields were 7%-8%, a significant premium over NAV was a good deal. At least they weren’t sucked into that “growth” trash can.

The latter group performed better, but cash was their best asset. Even if he used 8% or 15% of the capital and withheld his income, he could come back today and have each of these assets (I use the word loosely), much more cheaper.

what do you get today?

PTYs and PFNs have three major advantages that investors should keep in mind. The first is that you no longer have to pay top dollar for garbage assets. Let’s be honest, PTYs and PFNs buy and hold junk bonds, and buying them at the NAV discount will warm your heart.

That’s the PFN premium/discount move. PTYs still trade at a premium. But that premium/discount journey has been disastrous for those who bought this new paradigm.

The second thing you’re getting is that you’re buying these funds after a really bad run. On base, you earned a total of 11% in PTY and a total of 6% in PFN. That’s been the case for the past five years.

Five-year US Treasuries yielded 2.03% just five years ago. So in total he performed better than PFN and only about 1% worse than PTY if he accepted that bond.

It’s generally assumed that good managers will give more than their fair share after such a bad performance, as things are meant to go back in time. So you are doing it well.

Finally, all the bonds held by these two funds have suffered greatly from both credit and interest rate risk and are well below par. PTY’s portfolio features are: A bond with a face value of $100 at $79.65 will make you feel warm and tingly.

PFN is similar with a value of $80.96 for the same spot.

Biting considerations

Today, we believe the odds of a combined PTY and PFN return of 7%-8% are very high. Yes, the dividend yield will be higher, but you will have to contend with forced sales and bad debt losses. Total returns can be much lower. That might be great for some people, but it might be terrifying for those who bought at peak times. In eight years, it will break even after tax. break even. That said, even today this is no slam dunk affair. Three things to think about before chewing.

First, the leverage risk of PTY and PFN is very high. As a closed-end fund, they must stay within mandated margin levels and be forced to sell when prices fall. This creates a different dimension of risk than a simple unleveraged buy and hold. increase. Leverage today is lower than before.

For example, here is the data for the March 2022 article.

But that risk hasn’t gone away, and could continue to hurt returns if there’s a prolonged process of junk debt bottoming out.

The second aspect here is that, unlike 18 months ago, there are many good options today. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) currently yields 6.13% at maturity.

This is very ironic because at the peak of this madness people were ready to accept just 7.4% from PTYs.

It currently earns 6.13% from unleveraged investment grade credit. If you actually have the cash, you can dive in there instead of believing it’s garbage. Our big takeaway is that we have a lot of great options. I recently purchased preferred stock with a yield of almost 8%. Personally, I believe there is zero risk that the company will have problems. This raised the allocation to bonds to a total of 9.00% in the 60:40 model. It’s hard to dive into leveraged closed-end funds as we see so many yields above 7% with zero credit or virtually zero credit risk.

verdict

We have generally held a negative or very negative view of PTYs and PFNs. If you agree then you stay and now have cash to buy many great deals at great yields.

Things will get better from here.

No, you won’t be able to recoup your losses, but you should be able to see your total return in the positive column. It also upgrades the PTY from strong cell to hold while keeping the PFN on hold.

There are still many uncertainties in the future. I would say that all of our selected bonds are also declining. Luckily, I recently started buying. It was helpful. But this remains the toughest market we’ve weathered, and our hefty cash allocation was the only real SWAN for him (avoid drugs and sleep well).

Please note that this is not financial advice. It may sound like it, but surprisingly, it’s not. Investors are expected to conduct their own due diligence and consult professionals who know their objectives and constraints.