We are more than seven years into an economic expansion, but short-term interest rates are just a fraction of a point higher than they were during what many economists like to dramatize as a narrowly avoided depression (prevented by their heroic actions, of course). The Fed’s strategy of keeping rates in the tank to meet its ever shifting “economic goals” has created one of the greatest yield-reaching episodes in financial market history.
You have traditional bond investors trying to substitute higher risk dividend income for full-faith and credit pledge interest income. In bonds, junk has become the new investment grade. And long-bonds, with yields at record lows, are being touted as compelling capital gains opportunities.
The lack of yield has turned many investors into speculators. The Pimco Global StockPLUS & Income fund (PGP) is indicative of the type of mischief seven years of zero interest rates has encouraged.
PGP is a small closed-end fund that invests in futures contracts on the stock market and collateralizes them with a portfolio of actively managed bonds. There is nothing special about the fund’s investment strategy. PIMCO uses similar strategies in its open-end fund formats.
What makes PGP unique, is its managed distribution. The fund yields almost 11%. An 11% yield in the land of negative interest rates is too juicy for many yield-starved investors to pass up. But buying the fund solely for its yield is a grave mistake. PGP trades at a remarkable 109% premium to the underlying value of its holdings. That’s like handing over $2.09 for $1 worth of assets. If sentiment ever changes on this fund, the guillotine will come crashing down, and it ain’t gonna be pretty for fund shareholders.
