I bought PCI on Friday.

music selection:  “Down Boy” — Yeah Yeah Yeahs

weigh-in:  216.0 (3.2)

High yield and fixed income are a critical part of my strategy.  The options part of the strategy can be thought of as “short volatility”.  To balance that out (proper diversification) I need low Beta components of the portfolio.  I also need a steady current income in early retirement and monthly paying debt instruments fit the bill.

PIMCO Dynamic Credit Income Fund (PCI) is a closed end fund invested in a mix of debt instruments.  It has an average credit rating of Investment Grade.  Versus the trailing twelve months of distributions, it yields 11.42% and pays monthly.  I like this one a lot because Bill Gross (the “bond king”) is a major holder of shares and the advisors also own shares for their personal portfolios.  These guys are eating their own cooking.  Importantly, the fund is trading for a little better than 5% discount to NAV.  I am getting a dollar’s worth of assets for only 95 cents.

I bought this with cash from checking into the Wells Fargo brokerage.  So it represents a reduction in cash withdrawn from portfolio.  I’ll update my withdrawal rate at next transparency post accordingly.

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6 thoughts on “Buy PIMCO Dynamic Credit Income Fund (PCI)

  • July 11, 2016 at 11:22 pm
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    Where do you get the average credit ratings of the holdings?

    The Morningstar credit quality section is just blank…CEFA isn’t helpful. Even the schedule of investments in the annual/semi annual report doesn’t really speak to the credit quality.

    If the holdings are really investment grade, that would be a great yield considering the relatively short effective duration/maturity.

    I guess that means management is earning that 2.63% expense ratio? Yowza…that is spendy.

    Reply
    • July 12, 2016 at 1:25 am
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      Catfishwizard,

      I’m really on a paid research service for the credit rating information. Hope it is right!

      The expense ratio is spendy but you have to realize it is mostly to pay for the leverage they are using. Assuming 1.5% margin rate, it is still pricey but it is doing well and the advisors are personally invested there. I feel pretty good about this one. I like PDI even better but it is pricey and trading at a premium to NAV.

      Reply
  • July 12, 2016 at 4:06 am
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    I might quibble with saying it’s “mostly” going to margin costs.

    They are ~43% leveraged. So assuming a 1.5% margin rate is paid on 43 out of every 100 dollars investable, then that comes out to about $0.65 in interest or 65 basis points attributable to margin. Sure enough, M* lists their adjusted expense ratio as 1.97% versus the 2.63% reported.

    I think the PIMCO name just commands premium pricing. Even with Mr. Bill gone.

    The point is it has a dynamite yield and is trading below NAV. I can’t quibble with that!

    Mind if I ask what research service you’re using? So much data is available for free it’s always seemed hard to justify many of them. The CEFs can be thinly covered though.

    Reply
    • July 12, 2016 at 12:40 pm
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      Fair enough. And you are right. It is a pricey service. It isn’t a service a retail investor can duplicate on their own though. It would be quite expensive to build your own portfolio of hundreds of bond issues. As long as it is performing above market, I’m willing to let the vampires have their blood.

      The research service is Mega Trends Investing. It is a Palm Beach Letter product.

      Reply
      • July 12, 2016 at 3:41 pm
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        No doubt. Actively managed bond funds are one of the few places where I won’t sweat high expense ratios as much. I think in many cases, management really earns those fees.

        I do tend to cut off my filters at 1.5% though. Maybe 2% “adjusted” is a better ceiling…

        Have you ever played around with the Interactive Brokers Mutual Fund Replicator tool? It’s a neat idea, but I’m skeptical.

        For example, it has decided that a $10K investment in PCI could be replicated (86% correlation) with 162 shares of DSL and 59 shares of EMB. Sure that saves 1.4% in fees, but it only tracks total return. That combo only yields 6.3%, which kinda misses the point.

        Thanks for sharing about the newsletter. I will have to look into them a little bit.

        Reply
        • July 12, 2016 at 6:40 pm
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          CFW, I’ve never heard of the IB mutual fund replicator until now. Sounds like a good tool that doesn’t apply well to my situation. I have a high withdrawal rate and rely on favorable sequencing of returns. Current yield is thus more important to me than to an indexer.

          Reply

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