Recession puts even the best funds to the test
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Dear Mr. Berko:
I’ve been looking at Bill Gross’ Pimco High Income mutual fund, which is trading at $8.19 and yields 18 percent. This is a closed-end fund, and Gross is a successful mutual fund manager, so I would like to buy 1,000 shares. Please tell me your thoughts. I’m also looking at buying some American International Group preferred stock that trades on the New York Stock Exchange. The 6.45 percent AIG preferred is rated BBB, has a $25 par value, and pays a dividend of $1.61. This issue sells for about $8 a share and yields a little over 20 percent. Please tell me what you think of this one as a high-yield income investment.
B.D., Elgin, Ill.
Dear B.D.:
Bill Gross, probably the world’s most brilliant bond fund manager, is just as stupefied and muzzy about the past seven months as Alfred E. Newman.
In his wildest dreams, Gross could not have imagined a Fannie Mae or Freddie Mac default. Nor did Gross ever imagine that Pimco’s (PHK-$8.19) investments in the bonds of Citigroup Inc., Wachovia Corp., Charter Communications Inc. or Ford Motor Co. (some of PHK’s largest positions) would fall like tears from a tall camel’s eye. So PHK got trashed last year, crashing from $13.47 to $3.14.
However, Gross believes PHK will continue to pay its monthly dividend of 12.2 cents per share, or $1.46 a year, which it has paid since going public at $15 in July 2003. The current yield is a prodigious 17.8 percent. Gross hasn’t told us he will reduce the payout, but I think he could reduce it by 50 percent to 6 cents a month (72 cents annually), which is a sweet 9 percent and probably the worst-case scenario.
I think Gross should cut the dividend and use some of the surplus to reduce PHK’s high leverage. So yes, I’d be comfortable investing $9,000 in PHK, but not at this price.
PHK’s trading price of $8.19 is a substantial premium over its net asset value. I don’t believe PHK, Gross notwithstanding, warrants that premium. I feel within the coming three to seven months, the premium will fall more than the net asset value, and you might be able to buy PHK at the $5.70 level, which would yield a 12.6 percent current return. Be patient and place an open “good till cancel/do not reduce” order with your broker at the $5.70 price.
One junk bond that seems to enjoy favor among some of Wall Street’s bond fund managers is the $3.25 billion 8.25 percent American International Group Inc. bond issued by Morgan Stanley and Credit Suisse in August 2008. These bonds are in Gross’s PHK portfolio and are currently trading at $750 per $1,000 face value with an 11 percent current return and a 12.6 percent yield to maturity in August 2018.
Most of AIG’s preferred issues are yielding between 19 percent and 21 percent, and the U.S. government has invested so much money in AIG that there’s no turning back. In other words, AIG must not fail. However, the indenture on AIG’s preferred issues allows the company to defer dividend payments up to 10 years without giving rise to an event of default.
So far, AIG’s preferred stocks are paying their dividends. However, AIG’s ignominious board of directors, whose evil neglect allowed the company to implode, could decide to cut the dividends, and you’ll be standing on the roof without a ladder.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service
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