Pimco Dynamic Income Fund: 11.8% return, marginal net asset premium


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The 2022 stock market sell-off weighed heavily on the PIMCO Dynamic Income Fund (New York Stock Exchange: PDI). As a result of this liquidation, PDI is now trading at a negligible premium to the fund’s net asset value, potentially signaling to investors that the fund has become oversold. A current investment in the shares of the fund yields 11.8%.

Additionally, the fund offers broad country and industry diversity while maintaining a focus on US fixed income and investing.

Difference between CEFs and other fund structures

Before I get into the details of the PIMCO Dynamic Income Fund, I’d like to go over some key distinctions between closed-end funds, mutual funds, and exchange-traded funds.

A mutual fund is a form of open-ended fund that is normally managed by a fund company and is administered by a management team that chooses which assets to buy and sell. Fund companies invest in a variety of assets, including stocks, bonds and commodities, and then sell stocks to investors.

The main objective of a mutual fund is to provide investors with exposure to specific investment topics, nations, industries and asset classes, and the investment methodology can be active or passive. The mutual fund company normally sells mutual fund shares.

In contrast, exchange-traded funds represent the “index approach” to investing. They attempt to replicate index performance while reducing costs by closely mirroring an underlying stock market index. ETFs are listed on stock exchanges.

Closed-end funds, such as the PIMCO Dynamic Income Fund, fill an interesting gap in the fund universe because their shares are traded on an exchange and can therefore be bought and sold whenever an investor wishes: they don’t have to go through a corporate fund to get exposure to a theme like “income”.

The advantages and disadvantages of open-ended, closed-end, and exchange-traded funds are listed here.

Types of funds

Types of funds (Capital Group)

Fund specifics

The PIMCO Dynamic Income Fund aims to provide investors with the “best income-generating ideas in several global fixed income sectors”, and the fund has two objectives: to generate current income (the primary objective) and to pursue capital appreciation (secondary objective) .

Approximately 70% of the fund’s assets are invested in the United States. The United Kingdom is the second largest geographical area of ​​investment, representing 5% of total investments, followed by Brazil, which represents 3% of total fund assets.

The fund has made investments in a variety of industries, with the top five investment sectors being wireline, aerospace/defense, banking, utilities and healthcare. With the exception of banks, the majority of these sectors guarantee recession-proof businesses and reliable earnings.

Investments by industry

Investments by industry (PIMCO Dynamic Income Fund)

As of April 30, 2022, the fund’s net assets were $5.0 billion and mortgages were its largest investment category. In general, the fund invests in virtually any asset offering a fixed rate of return, be it mortgages, high yield credits, sovereign issues, convertible bonds, securities issued by agencies US government bonds (Fannie Mae, Freddie Mac) or municipal bonds. . Mortgages are the most important type of investment in the fund, accounting for approximately 30% of all investments.

Sector allocation

Sector Allocation (PIMCO Dynamic Income Fund)

Attractive distribution

The fund’s current dividend is $0.2205 per share and the fund’s income is paid monthly, making PDI an ideal fund for retirees who need to fund living expenses. The projected total annual distribution is $2.65, giving a dividend yield of 11.9%.

Data by YCharts

Net asset value and decreasing premium on net asset value

The net asset value of the PIMCO Dynamic Income Fund as of May 30, 2022 was $21.42. The net asset value of a fund is determined daily and is subject to daily fluctuations in the valuation of the assets of the underlying fund. The current price of the fund is $22.40, which represents a 4.6% premium to the net asset value.

The price of the fund fell below the calculated net asset value on May 24, 2022, causing the fund’s shares to trade at a price below the net asset value for a brief period. Shares of the fund have historically traded at a significantly higher premium to net asset value, indicating that investors’ desire for fixed income assets has diminished.

Net asset value

Net asset value (Finviz)

Why the Net Asset Value of the PIMCO Dynamic Income Fund Could Fall

If the assets that make up the combined net assets of the closed-end fund continue to decline in value, the price of the PIMCO Dynamic Income Fund may fall. This could be the case in a prolonged bear market, which would almost certainly follow a recession. As the fund is heavily invested in US fixed income assets, a US recession is likely to hurt the net performance of the fund’s assets in the short term.

My conclusion

Why should you buy PDI? For its 11.8% return and modest premium to NAV, both of which stem from the current sell-off in equity markets. The slight premium to net asset value suggests the fund may have been undervalued.

PDI is also very diversified and has a strong mix of fixed income assets. The fund is purchased for its monthly payout rather than for the possibility of net asset value development.

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