During the month of August, coverage remained stable across PIMCO’s taxable funds while tax-exempt coverage experienced a slight decline.
Taxable coverage has leveled off at an average of around 70% after rebounding from previous lows.
Among the funds, PAXS maintains the highest coverage, while PDO has seen a decrease and now holds the lowest coverage.
Borrowings have slightly increased across PIMCO’s taxable funds, possibly reverting to a more normal level. Noteworthy gains were seen in funds with relatively low leverage, such as PCN, PFL, and PFN. It’s important to consider potential noise from the ARPS redemptions in the previous month.
Leverage remains varied across the taxable funds, with PCM leading with a high 40% leverage.
The recently released shareholder report for PIMCO’s taxable closed-end funds reveals some interesting findings. Notably, there are significant cash holdings in the funds, such as PAXS, which has around 13% of its portfolio in Treasury repo agreements. These funds also borrow cash to finance their leveraged assets at higher rates, resulting in a 1% cost to maintain this structure. This raises questions concerning the operational advantages of the current setup.
Regarding distributions, only PCM showed a return of capital during June 2022 to June 2023. However, coverage for the taxable funds remains low at an average of just 68%, posing risks for future distributions.
The ARPS (auction rate preferred shares) buyback has been completed, with taxable fund buybacks ranging from 25% for PHK to 78% for PFL. Tax-exempt funds had smaller buybacks ranging from 11% to 24%. The tax advantages of the tax-exempt ARPS dividends likely influenced these numbers.
Valuations for PIMCO’s taxable closed-end funds remain elevated, especially when comparing them to the broader market.
Considering the valuation differential, investors may want to wait for better entry points throughout the rest of the year before investing in PIMCO’s funds.
Note: This article contains information on microcap stocks. Please be aware of the associated risks when investing in these stocks.