written by reader PIMCO’s HPK

By funu50401, January 28, 2013

If anyone knows, are this funds payouts ”qualified,” I.e., suject to the 15% dividend tax or are the payouts ordinary income. The ”hype” I’ve read on this says it can be DRIPed; if so, and if one DRIPed ones holdings, and the payouts continue at their present rate, this value of ones holdings in this fund would double in about 8 years.
Any one ”out there” know about thus PIMCO fund?

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Travis Johnson, Stock Gumshoe
January 28, 2013 10:04 am

I think you mean PHK, which is Bill Gross’ high yield corporate debt closed-end fund. I presume it’s not eligible for the lower tax rate, since it’s generating taxable income from bonds, but don’t know for sure — I would ask them if that matters to you. Many closed-end funds have dividend reinvestment plans and let you DRIP your dividends very similarly to what you would do with a dividend-paying stock, I believe PHK does provide for this but your broker can give you a specific answer.

Do note that this fund has traded at a hefty premium ever since the market crash as investors have sought income from junk bonds and, since it’s at a high premium, it will be quite sensitive to any rise in interest rates that might come from investors swapping out of bonds for equities … if that happens. Closed end funds can trade at substantial premiums or discounts based on investor sentiment, so shifts in investor sentiment for a sector can cause very volatile reactions for these funds — you don’t get just the impact of a big change in the underlying value of the bonds, you also get the fund itself moving faster because it moves from a discount to a premium, or vice versa. Right now you’re paying a 43% premium, which I find frightening — you’re effectively buying bonds that are worth $8.50 for a bit over $12. The premium has been higher on occasion, but it has also traded at a discount before (and, as you might guess, it has also sometimes traded at a more reasonable price within 5-10% of net asset value, which is more typical of closed-end funds). That doesn’t mean the price can’t go up, but it does mean that if the floor drops out of the price for any reason it can fall very, very fast — there’s a quick note on similar funds from Barron’s here from last fall: http://blogs.barrons.com/focusonfunds/2012/10/08/totally-gross-closed-end-premiums-still-around/

The basic info on the fund is here: http://www.allianzinvestors.com/products/pages/13.aspx

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