Last month I wrote a blog piece on the Montgomery Street Income Securities Fund (ticker: MTS). It is a fixed income closed-end fund that is currently trading at an 8% discount to net asset value.
Effective March 15, PIMCO became the interim investment adviser for the fund replacing Hartford Investment Management. The Fund will present a contract with PIMCO for approval by shareholders at the next annual meeting currently scheduled for July 8, 2010.
On March 22, I wrote another blog article which pointed out that all of the closed-end funds with “PIMCO” in their name were trading at a premium above net asset value. I think it is quite likely that MTS will also sell at a premium over NAV once PIMCO is officially approved by shareholders, especially if the fund name is modified to include the word “PIMCO”.
I believe that the main reason MTS is currently trading at a discount to NAV is because its distribution yield of 4.13% is low compared to its peers.
But PIMCO can easily raise the yield by making adjustments such as:
- Increase the leverage. Currently MTS is only using 9.5% leverage.
- Reduce the 48% holdings in low yielding US Treasuries/Agencies.
Full Disclosure: Long MTS.