Bill Gross is by any measure financially sophisticated. Which is why it’s entertaining to watch him reconcile his undoubtedly well-honed skills at investing with his firm’s management of one of the most overpriced closed end funds around. The closed end fund sector is one of the truly inefficient sectors in financial markets. Investors routinely confuse distributions with yield, and presume that a security sporting a 10% yield is offering good value that has just been overlooked by many other investors.
So it is that the Pimco High Income Fund (PHK) recently reached a price of $14, a heady 70% premium to the NAV of its assets. It reached this level because investors are searching for yield everywhere, and because Bill Gross is the portfolio manager. For many investors, Bill Gross at any price is better than the tyranny of low market rates, and who can blame them.
Barron’s ran an article on the weekend noting the absurdly high premium to NAV of this fund. Mr. Gross does eats his own cooking by investing a modest amount of his net worth in the fund. He would know as well as anybody that investing in a portfolio of high yield bonds at 70% above their market value is not a sensible strategy, and yet as PM he can hardly advise that way nor sell his own shares. This week PHK has fallen spectacularly (at least, by the standards of closed end funds) falling around 20% from its level of last week. It still sports a heady 50% premium, and perhaps that will be sustained. It’s not possible to short it, but let’s just say there are quite a few more sensible places to put your money than PHK. Unless you’re the PM there’s not much point in owning it.