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Explorer ○

How will Pimco CEFs fare in a recession

How will Pimco CEFs fare in a recession. The 3 I have, PCI, PCN, PKO are all heavy into mortgages. What will happen when there's a likely recession and mortgage defaults are many? Is this a bad time to be holding these CEFs? 

4 Replies
Highlighted
Explorer ○

Re: How will Pimco CEFs fare in a recession

I'd love to hear the answer to that one too.  Surprised there has not been a response yet.

My take: in the case of the multisector CEFs, you are giving an active manager the power to play in the world's largest market.  You are also giving him the ability to make a bond fund do things that a normal bond fund does not, through the use of derivatives and other means.  That's why these funds are sometimes called "bondish" funds rather than simply bond funds.  Furthermore, that active PM is backed up by the best bond firm in the business.  Add massive diversification among multiple multssector funds and you have an excellent all-weather strategy, in my view, one whose volatility is on average less than the SP500.  The main caveat: contrary to what you might hear, these are not "trading vehicles."  They are long-term buy-and-hold investments, even more so than the SP500.  Look at their track record.  So if you hold stock index funds, you should not bat an eye.  I am always amazed at how people label them as "risky" simply because they are leveraged, overlooking their own internal hedges and relative vol.  In a panic they will become more volatile than the SP500, but what doesn't.  You either need the rare prescience to sell near the top, or the stomach to ride out the volatility, same as SPY.  Finally, the high distribution rate has such an enormous impact on compounding that it is foolish to ignore relative to existing options.  The only failure of these funds was when two of them (PFN/PFL) were forced to delever during the GFC, which got their PM fired.  If you are worried about that recurring, which is unlikely, just wait and see how they fared in the current crisis before investing.

Paul

Highlighted
Participant ○○

Re: How will Pimco CEFs fare in a recession

My approach to CEFs has been to diversify them among portfolio asset classes, sponsors, managers, and amount of leverage. It's a way to minimize the effect of any one of them blowing up. I have limited my ownership to the amount of money I am willing to lose.

We are likely in a recession now, so we can understand how CEFs fare in one. That appears to be that they move in tandem with equity.

Highlighted
Participant ○○○

Re: How will Pimco CEFs fare in a recession


@zaharaone wrote:

I'd love to hear the answer to that one too.  Surprised there has not been a response yet.

My take: in the case of the multisector CEFs, you are giving an active manager the power to play in the world's largest market.  You are also giving him the ability to make a bond fund do things that a normal bond fund does not, through the use of derivatives and other means.  That's why these funds are sometimes called "bondish" funds rather than simply bond funds.  Furthermore, that active PM is backed up by the best bond firm in the business.  Add massive diversification among multiple multssector funds and you have an excellent all-weather strategy, in my view, one whose volatility is on average less than the SP500.  The main caveat: contrary to what you might hear, these are not "trading vehicles."  They are long-term buy-and-hold investments, even more so than the SP500.  Look at their track record.  So if you hold stock index funds, you should not bat an eye.  I am always amazed at how people label them as "risky" simply because they are leveraged, overlooking their own internal hedges and relative vol.  In a panic they will become more volatile than the SP500, but what doesn't.  You either need the rare prescience to sell near the top, or the stomach to ride out the volatility, same as SPY.  Finally, the high distribution rate has such an enormous impact on compounding that it is foolish to ignore relative to existing options.  The only failure of these funds was when two of them (PFN/PFL) were forced to delever during the GFC, which got their PM fired.  If you are worried about that recurring, which is unlikely, just wait and see how they fared in the current crisis before investing.

Paul


Although Mark Kiesel was replace as the manager of PFN/PFL, he only went on to greater things at PIMCO.  

 

Highlighted
Explorer ○○○

Re: How will Pimco CEFs fare in a recession

I hold only 3 cefs - they are PCI, BTZ and HTD - and I am not selling any of them. In fact, I am microdosing meaning buying a couple of shares every day during this bear market which I think will last a long time.

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