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Monday, October 15th, 2012
playing with fire

I’ve written a few times about the interesting world of closed-end funds.  They can be double-barreled excitement — if you get the thesis right, both the underlying portfolio and the price relative to net asset value can change in your favor.  But they can both turn against you too.

Because of managed distributions that are essentially fake yields, some of the funds are attractive to those reaching for yield and can trade at persistent premiums, even whopping ones.  That sets owners up for a bad risk/reward situation.  Every once in a while, the psychology comes unglued and there’s a sharp move.  That’s what’s happened of late.

In each panel, you see Pioneer High Income Trust (PHT), Pimco Global StocksPLUS & Income Fund (PGP), and Pimco High Income Fund (PHK).  The top panel is the total return for the year and the bottom one shows the ratio between the market price and net asset value.

To take PHK as an example, it’s a comfort to many that Bill Gross manages it and owns a bunch, but in the scheme of things it’s peanuts for him.  If it craters, it won’t ruin his reputation or his wallet.

From the list of holders, you can tell that these things have been popular with brokers.  I’d love to hear their pitches to clients.  I doubt if the words “playing with fire” are in there anywhere.  Yet that’s what they are doing.  (Chart:  Bloomberg terminal.)