Pimco Closed-End Funds Leave Investors At A Loss
Closed-end funds often seem to be a prime investment haven for retirees. The funds, which invest in various securities, provide monthly dividends that are often higher than yields in the bond market. On the downside, the share prices of a closed-end fund can quickly rise or fall depending on market forces, as well as the changing values of the underlying securities in a fund.
In recent months, many closed-end funds, including those of Pacific Investment Management Co. (Pimco), are selling at huge discounts to the net asset values of their holdings. As of September, the average discount was 16%, nearly double the 12-month average, according to Lipper, Inc.
According to a Nov. 9 article in the Chicago Tribune, there were 668 closed-end funds at the end of 2007, with assets totaling more than $300 billion. As of the end of September 2008, only 53 were trading at a premium to their net asset values.
Some of the problems hitting closed-end funds have to do with the use of leverage, or gearing, to boost yields. One of the ways closed-end funds raise additional investment capital is by issuing auction-rate securities. When the auction-rate market collapsed in February, it essentially wiped out a major source of financing for closed-end funds.
As a result of volatile market conditions, many closed-end funds are suspending their monthly dividend payments to investors. Last month, the Pimco High Income Fund did just that, postponing its November dividend payment because the value of the securities in the fund’s portfolio had fallen below a key threshold. The fund suspended the declaration of its next dividend payment, as well, which would have been paid this month.
Pimco later announced that several other Pimco funds also would postpone scheduled payments of previously declared dividends on the funds’ common shares for Dec. 1 and Dec. 31. Those funds include the Pimco New York Municipal Income Fund, Pimco Municipal Income Fund II, Pimco California Municipal Income Fund II, Pimco Municipal Income Fund III, Pimco California Municipal Income Fund III and Pimco New York Municipal Income Fund III.
If shares in the Pimco funds fail to recover, the company could be forced to liquidate a portion of them to meet the required 200-percent asset coverage criteria.
Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
