Pimco Income Strategy Fund II

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PFN tanks after 10.25 percent dividend cut.

When I started investing in closed end funds (CEFs) there was always a warning on the investment summary page that said: Closed end funds are subject to the risk of their underlying assets and investment strategy. Unlike open end funds, closed end funds trade on an exchange at a price which is often a discount to their net asset value (NAV). The market price may experience periods of increased volatility due to the use of leverage as well as market and fund illiquidity. PFN is a multi-sector bond fund with a 1.62% expense ratio. PFN holds higher risk corporate bonds, with less than 20% of its total assets invested in securities that are rated CCC+/Caa1 or lower. On September 1st, the price per share was $11.42. Today, nine days later, the price is $10.18. Why the sudden drop? The monthly distribution statement held the answer. The monthly dividend was going from 8 cents to 7.18 cents per share. This represents a dividend cut of 10.25%. That is how much the price per share moved down in the days following the distribution statement.

In order to get the same monthly payout, I need to buy another 100 shares. My average price is $9.87, which is still below $10.18, but not by much. With closed end funds the goal is monthly income, but a little capital appreciation is nice too. This one just got to far ahead of the NAV and the dividend cut triggered a price adjustment. I had gotten so used to seeing the same dividend number on the monthly statements, that I didn’t bother to look at it this time. The last time Pimco changed the dividend on PFN was back in 2012, and that was an upward revision. This is the only corporate bond CEF that I own. My other CEFs are in various other investment categories. A form of CEF diversification. I also have YYY which is an ETF of CEFs. Another way to diversify. YYY had a number of closed end funds that I was thinking of investing in anyway. It has a nice 8.87% yield. Although, the 2.45% expense ration is a little higher than I would like. Being a “fund of funds” the share price isn’t as volatile and you still get a nice yield. It’s a pain to sell a CEF that has gone up in price, because then I have to start looking for another one with a similar yield to fill the monthly distribution gap.

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