Gross High Income Fund May Start Buying Interest-Only Securities

Wednesday, 03 Apr 2013 05:58 PM

 

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Bill Gross’s Pimco High Income Fund is changing its investment policy so it can invest in less liquid securities to take advantage of changes in interest rates and the housing market.

The $1.53 billion closed-end fund, which is trading at a 44 percent premium to its net asset value, may now invest in interest-only securities, principal-only securities and inverse floating-rate securities, according to a statement Wednesday from Newport Beach, California-based Pacific Investment Management Co. The fund, which opened in April 2003, has a 12-month yield of 11.8 percent.

“The fund’s management team believes the fund would benefit from the ability to utilize these instruments in targeted situations in current and future market conditions,” according to the statement.

Interest-only securities receive all of the interest in a pool of mortgage-related or asset-backed securities compared with principal-only securities, which get all of the principal. Interest-only and principal-only bonds are affected by how quickly borrowers repay the principal amount of their debt. Inverse floaters are debt instruments whose interest rate moves in the opposite direction of a reference rate.

Closed-end funds sell a fixed amount of shares to raise money for investments and then trade on an exchange like stocks. They can trade at a price that’s higher or lower than the value of its underlying holdings. Gross, who started managing Pimco High Income in May 2009, is better known as manager of the $289 billion Pimco Total Return Fund, the world’s biggest mutual fund.

Closed-end funds tumbled during the 2008 financial crisis as markets declined and borrowing dried up. They were also squeezed by the collapse in February 2008 of the auction-rate market, which historically helped managers raise money to boost returns. Many, including the Pimco High Income Fund, suspended dividend payments as assets plunged and they couldn’t use leverage. Pimco restored dividends on its closed-end funds when the markets rebounded in 2009.

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