PIMCO Tax Free Municipal Bond Closed End Fund CEF: National and State Muni

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Bond investment

Bonds, also known as fixed incomes, are a core element of diversified portfolios, as they tend to move independently to stocks and therefore reduce volatility. Bond investment is very popular to many investors especially for retired or near retirement investors. Bonds are also safer. Based on many studies, bonds tend to produce lower long-term returns than stocks, so this type of investment may not very popular to younger investors who can tolerate more short-run volatility.

Fixed income investment can be done through several ways such as individual bond, mutual funds, exchange traded funds (ETF), closed end funds (CEF). Although, there is a risk in investing in bond fund, the investment risk is lower than investing in stock or equities. The only risk in fixed income investment is the companies or entities may default on their debts.

Why are bonds attractive? Three reasons are:

  1. Bonds pay a fixed rate of interest income or distribution yield over time. This payment can be either monthly and/or quarterly. If this distribution is reinvested, the investment can grow even more.
  2. The bond value is less volatile than any stock value. Investors do need to know some basic information about the bonds such as maturity, credit quality, expense, commission and etc.
  3. Fixed incomes carry the promise of their issuer to return the face value of the security to investor at maturity; stocks value may go up or down at any time.


Why Closed End Funds?

Similar to exchange traded fund (ETF), Closed End Fund (CEF) is also traded like a stock in various stock exchanges such as NYSE or AMEX. While it is less popular than ETF (exchange traded fund ), CEF can create a great buying opportunity especially for deeply discounted CEFs. These funds may trade below their net asset value (NAV). The list includes non taxable fixed income funds (or municipal bond funds). The data are compiled from cefa, cefconnect and closed-endfunds websites. If you are interested with taxable bond such as corporate bond, government bond and high yield or junk bond, please check my other article about PIMCO Taxable Bond CEF.

In this article, I’ll focus on fixed income investment in PIMCO municipal bond closed end funds. Pacific Investment Management Company (PIMCO) is a well known global investment management company focus on bond or fixed income investment. PIMCO is a unit of Munich-based insurer Allianz SE and is part of Allianz Global Investors Fund Management.

PIMCO also has 2 very well known Chief Investment Officers (CIO), Bill Gross and Mohamed El-Erian. Bill Gross or William H. Gross is the well known bond guru who also runs PIMCO's $252.2 billion Total Return Fund. The Pimco Total Return Fund has consistently outperformed the index as well as its competitor.

Municipal bonds

Bond can be divided into 2 different types such as taxable bonds and non taxable bonds. Taxable bonds can be classified into many different bonds such as corporate bonds, investment grade bond, high yield bond, government bond, treasuries, multisector bond, bank loan, mortgage bond and more. The other bonds are non taxable bonds or tax free bonds which are known as Municipal Bonds. Municipal bonds or muni bonds in short, are bonds issued by a state, city, or local government. Interest payments on municipal bonds are generally exempt from Federal taxes. If bought by a resident of the state that issued the bond, the interest payments may be exempt from Federal government tax (IRS) and state tax, and if bought by residents of the locality that issued the bond, the interest payments may be exempt from Federal, state and local taxes.

Note: Muni Bond CEFs often use leverage. These CEFs maybe more volatile than non leverage CEFs or ETFs. Some funds may offer insured muni bonds which can provide additional guarantee by insurance companies. The insurers include: AMBAC Assurance Corporation, CIFG Assurance North America, Inc., Financial Guaranty Insurance Company, Financial Security Assurance Inc., MBIA Insurance Corporation, XL Capital Insurance, Assured Guaranty Corp., MGIC Radian Financial Group and American Capital Access.

Complete PIMCO Municipal Bond CEF

(click column header to sort results)
Fund Name  
Ticker  
Type  
Yield  
Mkt Cap (M)  
Base. Expense  
1Yr Rtn  
Eff Leverage  
Prm / Disc  
Closing Price  
PIMCO Municipal Income
PMF
Municipal Bond National
7.80%
$314
1.34%
6.85%
45.88%
17.26%
$12.50
PIMCO Municipal Income II
PML
Municipal Bond National
7.84%
$598
1.25%
1.05%
43.79%
2.05%
$9.95
PIMCO Municipal Income III
PMX
Municipal Bond National
8.02%
$337
1.44%
7.52%
47.07%
17.89%
$10.48
PIMCO CA Municipal Income
PCQ
Municipal California
7.76%
$218
1.34%
1.65%
48.30%
5.31%
$11.90
PIMCO CA Municipal Income II
PCK
Municipal California
8.66%
$270
1.34%
6.06%
50.50%
22.49%
$8.66
PIMCO CA Municipal Income III
PZC
Municipal California
8.05%
$195
1.47%
4.32%
46.91%
8.62%
$8.95
PIMCO NY Municipal Income
PNF
Municipal New York
6.77%
$77
1.41%
2.76%
44.32%
1.61%
$10.10
PIMCO NY Municipal Income II
PNI
Municipal New York
7.52%
$114
1.43%
1.91%
46.33%
6.77%
$10.57
PIMCO NY Municipal Income III
PYN
Municipal New York
7.40%
$48
1.72%
1.36%
45.77%
3.03%
$8.51
data is updated on 01/08/2011

1. National Municipal Bonds

A. PIMCO Municipal Income

The PIMCO Municipal Income Fund seeks to provide current income exempt from federal income tax. Under normal market settings, the PIMCO Municipal Income Fund expects to be fully invested (>90% of asset) in a portfolio of municipal bonds the interest from which is exempt from federal income taxes. This bond fund distribution is tax free or tax exempt from federal income tax. This CEF is part of Allianz Global Investors Fund Management offerings. The fund manager is John Cummings since 2008. The top 5 sectors are Hospital Revenue, Tobacco, Industrial Development / Pollution control, State/Local government and Special Tax. The top 5 state municipals are Texas, California, Pennsylvania, Louisiana and New Jersey. There are 173 bonds in its holding currently. The total expense is 1.46% per year which is high and it currently sells at premium from its NAV.

B. PIMCO Municipal Income II

PIMCO Municipal Income II fund investment objective is to seek current income exempt from Federal income tax through investment in investment grade municipal bonds. The fund manager is John Cummings since 2008. The top 5 sectors are Hospital Revenue, Tobacco, Special Tax, State/ Local Government and Industrial Development / Pollution control. The top 5 state municipals are Illinois, Texas, Massachusetts, Rhode Island, and California. There are 198 bonds in its holding currently. The total expense is 1.39% per year which is high and it currently sells at slightly premium from its NAV, 1.44%.

C. PIMCO Municipal Income III

PIMCO Municipal Income III fund seeks current income tax free from Federal income tax through investment in investment grade municipal fixed income securities. The fund manager is John Cummings since 2008. The top 5 sectors are Hospital Revenue, Water & Sewer, Tobacco, State/ Local Government and Power Revenue. The top 5 state municipals are Michigan, Texas, California, Illinois and Washington. There are 167 bonds in its holding currently. The total expense is 1.92% per year. The expense fees include baseline expense of 1.44% and interest expense of 0.48%. The fund is currently traded at 17.99% premium from its NAV.


Bill Gross bought PIMCO muni-bond funds

Bill Gross has recently use $5.5 million of personal money into the purchase of shares in five municipal funds, as he helps manage PIMCO's more than $1 trillion in assets and the world's largest bond fund. Details in the table.

2. State Municipal Bonds

There are two types of State Muni bonds offered by PIMCO. They are New York Muni bond CEFs and California Muni Bond CEFs. These state municipal is more volatile than national municipal, please trade accordingly.

California Municipal

D. PIMCO CA Municipal Income

PIMCO CA Municipal Income fund investment objective is to seek current income exempt from Federal and CA income tax. The fund will invest through investment in investment grade fixed income California municipal bonds. As part of PIMCO, this fund is sponsored by Allianz Global Investors Fund Management. The fund has a total net asset of 262 million as of January 2011. The fund manager is John Cummings since 2008. The top 5 sectors are Lease Revenue, Hospital Revenue, Tobacco, Special tax and Education Revenue. There are 119 bonds in its holding currently. The total expense is 1.50% per year. The expense fees include baseline expense of 1.34% and interest expense of 0.15%. The fund is currently traded at 6.33% premium from its NAV.

E. PIMCO CA Municipal Income II

PIMCO CA Municipal Income II fund investment seeks current income exempt from Federal and CA income tax. The fund will invest through investment in investment grade fixed income California municipal bonds. As part of PIMCO, this fund is sponsored by Allianz Global Investors Fund Management. The fund has a total net asset of 444 million as of January 2011. The fund manager is John Cummings since 2008. The top 5 sectors are Hospital Revenue, Special tax, lease revenue, water & sewer and tobacco. There are 116 bonds in its holding currently. The total expense is 1.56% per year. The expense fees include baseline expense of 1.34% and interest expense of 0.22%. The fund is currently traded at 23.93% premium from its NAV. It also currently has a yield of 8.62% per year which is tax free.

F. PIMCO CA Municipal Income III

PIMCO CA Municipal Income III fund investment seeks current income exempt from Federal and CA income tax. The fund will invest through investment in investment grade fixed income muni bonds. The fund has a total net asset of 337 million as of January 2011. The fund manager is John Cummings since 2008. The top 5 sectors are Hospital Revenue, State/Local Government, lease revenue, tobacco and special tax. There are 97 bonds in its holding currently. The total expense is 1.77% per year. The expense fees include baseline expense of 1.47% and interest expense of 0.29%. The fund is currently traded at 7.80% premium from its NAV. It also currently has a yield of 8.14% per year which is tax free from federal tax and California state tax.

 

New York Municipal

G. PIMCO NY Municipal Income

PIMCO NY Municipal Income fund (Ticker: PNF) investment objective is to provide current income exempt from Federal, NY and NYC income taxes. The fund will invest in investment grade municipal fixed income securities or debts. The fund has a total net asset of 135 million as of January 2011. The fund manager is John Cummings since 2008. The top 5 sectors are Hospital Revenue, water & sewer, Industrial Development /Pollution Control, Transportation and education revenue. There are 59 bonds in its holding currently. The total expense is 1.52% per year. The expense fees include baseline expense of 1.41% and interest expense of 0.10%. The fund is currently traded at 2.43% premium from its NAV. It also currently has a yield of 6.77% per year (distribution amount: $0.057 monthly per share) which is tax free from federal tax and NY state tax.

H. PIMCO NY Municipal Income II

PIMCO NY Municipal Income fund II (Ticker: PNI) seeks current income exempt from Federal, NY and NYC income taxes through investment in investment grade New York municipal fixed income securities. The fund has a total net asset of 197 million as of January 2011. The fund manager is John Cummings since 2008. The top 5 sectors are Hospital Revenue, Industrial Development /Pollution Control, Transportation, education revenue, and Special Tax. There are 72 bonds in its holding currently. The total expense is 1.54% per year. The expense fees include baseline expense of 1.43% and interest expense of 0.10%. The fund is currently traded at 6.31% premium from its NAV. It also currently has a yield of 7.61% per year (distribution amount: $0.0663 monthly per share) which is tax free from federal tax and NY state tax.

I. PIMCO NY Municipal Income III

PIMCO NY Municipal Income III fund (Ticker: PYN) investment objective is to seek current income exempt from Federal, NY and NYC income taxes. The fund will invest in investment grade municipal fixed income securities or debts. The fund has a total net asset of 85 million as of January 2011. The fund manager is John Cummings since 2008. The top 5 sectors are Hospital Revenue, Industrial Development /Pollution Control, education revenue, special tax and water & sewer. There are 50 bonds in its holding currently. The total expense is 2.29% per year. The expense fees include baseline expense of 1.72% and interest expense of 0.56%. The fund is currently traded at 4.63% premium from its NAV. It also currently has a yield of 7.34% per year (distribution amount: $0.0525 monthly per share) which is tax free from federal tax and NY state tax.

 

Disclosure: I have no affiliation with any of these funds. I also have no position in these funds. Please do your own research for additional details. Please trade and invest responsibly. Past Performance is No Guarantee of Future Results.

Update January 11, 2011

Bill Gross has used his own money to purchase in the following 5 funds from December 7,2010 till December 13, 2010 for $5.5 millions total value. Should I buy these funds as well? If I do, I'll need a brokerage account such as Fidelity, TD Ameritrade, Scottrade, eOption, Zecco, Sogotrade and more.

Muni Bonds CEF Bought by Bill Gross

(click column header to sort results)
Fund  
Ticker  
Value  
PIMCO Municipal Income
PMF
$839,012
PIMCO Municipal Income Fund III
PMX
$1,696,345
PIMCO CA Municipal Income
PCQ
$1,336,818
PIMCO CA Municipal Income II
PCK
$1,084,470
PIMCO CA Municipal Income III
PZC
$592,234

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4 comments

Simone Smith profile image

Simone Smith 5 years ago from San Francisco

Great overview! I appreciate your introduction to bonds and their importance within a broader investment portfolio, your summaries, and the helpful tables! Great Hub!


chan0512 profile image

chan0512 5 years ago from Camarillo, CA Author

Thanks Simone. In my opinion, Bonds should be part of everyone investment portfolio. Bonds can provide consistent income hence they usually pay distribution regularly.


jasl 4 years ago

The CA funds have a fairly high leverage ratio. How does this impact risk, in addition to the issuer defaulting?


chan0512 profile image

chan0512 4 years ago from Camarillo, CA Author

Jasl,

Most of municipal bond CEFs are leveraged funds. If you are worry about the leverage funds, you can choose a non leverage muni bond cef. The high leverage ratio does increase the risk and yield. I'll provide this information next.

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