The Cheap Pimco Fund That Has Gross Reaching for WalletLisa Abramowicz
Billionaire Bill Gross can’t resist this rarity: A slice of the corporate debt market that still looks cheap.
Gross has been adding to his personal holdings this year in Pacific Investment Management Co.’s $1.5 billion Dynamic Income fund as demand picks up for an asset class that was left for dead in 2013, data compiled by Bloomberg show. The closed-end credit fund is up 16.6 percent in 2014 as the discount between its share price and the assets the fund owns has disappeared.
Most other such funds are still inexpensive by this measure because they haven’t yet generated enough demand to close the gap between their share prices and the value of the assets they own. The funds -- which raise a fixed amount of money through public offerings and typically use leverage to amplify bets -- tanked last year as the Federal Reserve signaled it would start tapering its stimulus.
Shares across the $118.6 billion taxable fixed-income closed-end category are trading at prices that are 5.6 percent below their net asset values, according to research compiled through the end of April by Eric Boughton, chief analyst and money manager at the $84.4 million Matisse Discounted Closed-End Strategy. That compares with an average discount of 3.8 percent over the past nine years.
As RiverNorth Capital Management LLC’s Steve O’Neill put it: “They got clobbered last year.” Pimco’s Dynamic Income fund plunged 9.4 percent in the three months through July 2013, according to data compiled by Bloomberg.
While individual investors are still shying away, O’Neill is in the camp of professional money managers who share Gross’s bullish view. Saba Capital Management LP, the hedge fund run by Boaz Weinstein, has also been a buyer, adding to a stake in the biggest such fund, Pimco’s $3.2 billion Dynamic Credit Income fund.
That Pimco fund has gained 7.2 percent in 2014, and Gross has been adding to his shares in that one, too, boosting his holdings to $42.7 million as of May 16, Bloomberg data show.
“The retail market is fearful, but the institutional market is putting money to work,” said O’Neill, a money manager at RiverNorth, which specializes in trading closed-end fund shares and owns both of the Pimco funds.
So far, it’s paying off for those who’ve opted in with average 7 percent returns this year. That’s better than the 5 percent return on U.S. corporate bonds and about 2.3 percent on the Standard & Poor’s 500 index including reinvested dividends.
With few corners of the credit market left that haven’t been picked over, betting on one of last year’s pariah investments may not remain a cheap trade for much longer.