PCO：我无法超越保费

PCN has been pushing higher in 2019, along with most of the fixed-income sector.

While the fund\'s high yield should continue to draw interest, the premium to NAV above 20% makes me very cautious.

On a positive note, PCN\'s income production metrics are extremely strong, which tells me the fund\'s distribution is safe for now.

The purpose of this article is to evaluate the PIMCO Corporate & Income Strategy Fund (NYSE:PCN) as an investment option. While PCN has been performing well in 2019, I am reiterating my cautious stance on the fund. For income-oriented investors, this fund could fit the bill, as PCN has seen its income production markedly improve in the short-term. This indicates to me that the fund's almost 8% yield is safe for now. However, there are some drawbacks to buying in now. For one, PCN's premium has risen dramatically, to the point where it seems unwise to initiate new positions. If the fund reverts back towards its short-term average, that will mean pain for current investors. Two, high yield bonds, which have rallied recently, saw marked drops after the latest interest rate cut from the Fed. With another cut likely coming next week, it sees to me investors would be wise to see if another sell-off materializes post-cut, which could present a better buying opportunity than currently exists.

First, a little about PCN. It is a closed-end fund with a primary objective "to seek high current income, with a secondary objective of capital preservation and appreciation." Currently, the fund is trading at $17.64/share and pays a monthly distribution of $.1125/share, which translates to an annual yield of 7.53%. When I reviewed PCN in April, I slapped a neutral rating on the fund. Although I saw positive attributes, the fund's premium was a bit rich for my taste. Despite that high cost to own, PCN has performed well since then, as shown below:

Source: Seeking Alpha

Despite this positive return, I do not regret my call, and the fund has seen plenty of volatility in the interim. However, given the time that has passed, I wanted to reassess the fund to see if I should change my outlook, or if further caution is warranted. After review, I believe my neutral rating remains appropriate, and I will explain why in detail below.

To begin this review, I want to highlight the primary reason why I am reluctant to recommend this fund - the premium to NAV. While this has long been a sore spot for me with regards to PCN, including during my April review, this time around the problem is amplified. My concern is that while the premium to NAV was high back in April (at 18%), it was still only a few points away from the fund's short-term averages. This told me the fund, while expensive on the surface, would likely hold up fairly well because the price was within its normal range. This time around, the story is not quite as positive. Not only has the premium grown over the past five months, but the divergence from the short-term averages has as well. To put PCN's current premium in perspective, I listed some relevant metrics from 2019 below:

Source: PIMCO (calculations made by Author)

As you can see, the chart paints a mixed picture, with a slant toward the negative. On the plus side, PCN has been registered consistent gains to its underlying value, by showing a rise of almost 5% this year for the fund's NAV, in addition to paying out monthly distributions. Furthermore, PCN's current premium is slightly lower than its year-to-date high, which tells me further upside is certainly possible.

However, it should also be pretty clear from the chart that PCN is not a value play right now, no matter how you slice it. The current premium of almost 23% is high just on the surface, and the fact that it is almost 5% higher than its average this year tells me patient investors will likely find a better buying opportunity if they wait for it. While PCN's NAV gain is definitely reassuring, the fact is that the fund's market price is greatly exceeding this move, resulting in an ever increasing premium. While this is good news for current investors, it presents a mixed signal for investors wanting to buy in now. With other PIMCO options trading at significantly lower premiums, it is difficult for me to justify buying PCN at this time.

A second point on PCN is a bit more positive, and relates to the fund's income production. As a high yield CEF, a reliable distribution is of paramount importance, so evaluating how much income the fund is generating is a good way to see how healthy the fund is, and how safe the distribution is. Fortunately, this is an area where PCN has shown marked improvement, which gives me some confidence the fund is holding the right types of assets for our current economic environment.

To illustrate, consider PIMCO's most recent UNII report, shown below:

Source: PIMCO

As you can see, these figures are pretty strong. PCN has short-term ratios that are all over 100% and, perhaps more importantly, the fund's three month coverage ratio is showing accelerating income coverage. This is a very healthy sign that shows the fund is improving in the short-term. Furthermore, the chart shows a UNII balance of $.15/share. This indicates PCN has over a month's worth of income in reserves to cover any potential shortfall. This tells me the current distribution is safe for now, which is obviously a critical component of CEF investing.

My overall takeaway here is positive, as it relates to current positions. While I still cannot get past the high cost to buy PCN now, the income figures are a primary reason why I am "neutral" and not "bearish". With the income stream looking safe, current investors will be able to collect a reliable high yield, and it is up to them if they want to shoulder the risk of a potential correction in share price due to the above-average premium. While my own take is to wait for a better opportunity, the income metrics show there is a valid argument to be made for having positions now.

My final point on PCN has to do with the fund's underlying holdings. Specifically, this relates to my short-term outlook for the high-yield corporate bond sector. This is an area that is of some importance for PCN, as it makes up almost 27% of total fund assets, as illustrated in the chart below:

Source: PIMCO

Clearly, this is an area of importance for PCN, and it is becoming even more so with time, as the fund only had 24% exposure to this area back in April. Therefore, I want to discuss why I think this exposure will allow investors to pick up the fund at a better price over the next few weeks.

My reasoning for this outlook is due to two factors - the current outlook for Fed action on interest rates and high yield's performance before and after the July rate cut. Taking potential Fed action first, market sentiment appears to be heavily favoring another .25 basis point cut during the September 18th meeting. According to data compiled by CME Group, which tracks the futures market for investor sentiment on interest rate movements, the current probability of a rate cut next week is just under 89%. While this indicates there is potential for inaction, it is clearly widely believed the Fed is going to make another quarter-point cut in interest rates.

With this in mind, I found it helpful to review the performance of high yield debt the most recent time the Fed cut rates, which was back in July. Not surprisingly, there seems to be similar price action leading up to the potential cut next week. For instance, prior to the July rate cut, high yield spreads deceased, partly as a result of investor interest in the sector. This time around, the story is the same, with spreads declining through last week (9/6), as shown below:

Source: Wall Street Journal

As you can see, a similar pattern is emerging. However, another takeaway from this graph is that immediately after the rate cut on July 31, spreads widened aggressively, indicating a reversal in interest for the high yield sector. This leads me to conclude that investors were favoring this debt leading up to the cut, and then expressed concern over the actual cut itself, probably due to economic growth fears.

My takeaway here is that we may see a similar story unfold next week, so it could be wise for investors to remain patient now, because better prices could present themselves very soon. With high yield credit making up a sizable portion of PCN, this is very relevant for the fund. While this prediction is by no means a certainty that this trade will play out in a similar way, recent history shows us that the market is taking on risk in anticipation of the cuts, but then grappling with the fallout from the cut itself. This could be because while investors view lower rates as a positive, they then become more concerned about the reasons behind

a cut was needed. With current spreads narrowing to the levels we saw right before the July cut, I feel it is prudent to hold off on chasing returns until the dust settles from the next one.

Back in April I expressed caution with respect to PCN, and this time around my sentiment remains the same. While PCN's income stream looks safe, aided by improving income production, I feel the risks outweigh the rewards right now. Chief among the risks is the fund's high premium, which exceeds 20% and is noticeably higher than PCN's trading averages. Furthermore, high yield credit, which makes up over a quarter of PCN's portfolio, appears ready to correct, if trading history from the last Fed rate cut serves as a guide. Therefore, I am reiterating my neutral outlook on PCN, and recommend investors remain patient and wait for a better entry point to present itself.

I am/we are long PCI, PCK, PMF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.