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NEW YORK ( TheStreet) -- Bill Gross is famous for managing PIMCO Total Return(PTTAX) , the largest bond fund. But his top performer has been PIMCO High Income(PHK), a little-known closed-end fund.
During the past five years, the high-income fund has returned 16.8% annually, outdoing nearly all the fixed-income funds tracked by
Morningstar. The PIMCO portfolio pays an eye-popping distribution of 11.4%.
Should you rush out to buy the star PIMCO fund? Probably not. The problem is that the fund sells at a steep premium. Like other closed-end funds, PIMCO High Income trades on exchanges like stocks. When investors are enthusiastic about a closed-end fund, they can bid the share price above the value of the assets in the portfolio. That has happened to PIMCO High Income and the shares now trade at a 41% premium.
In other words, an investor must pay $1.41 to buy a dollar of assets. "It makes no sense to pay such a huge premium," says Mike Taggart,
Morningstar's director of closed-end fund research.
Taggart cautions that premiums often melt away as share prices dip. During the past three years, PIMCO's premium has been as high as 86%. At other times, the premium disappeared entirely. In the darkest time of the financial crisis, the fund dropped to a discount of 29%.
PIMCO High Income is not the only fund to sell at a big premium these days. According to
Morningstar, there are currently 19 funds that sell for premiums of more than 10%. The most expensive fund is
Cornerstone Total Return(CRF), which has a premium of 52%. Other high-premium funds include
BlackRock VA Municipal Bond(BHV), with a premium of 23.9%, and
Pioneer High Income(PHT) , with a premium of 13.6%.
Instead of buying funds that sell at steep premiums, most investors should focus on portfolios that sell at discounts. To own a fund that sells at a small discount, consider
Invesco High Yield(MSY). During the past five years, the fund returned 12.2% annually and outdid 79% of its peers. Invesco pays a distribution of 8.7%.
Another fund that sells at a discount is
Nuveen Municipal Income(NMI) , which returned 5.3% annually during the past five years and outdid 84% of competitors. The fund pays a distribution of 5.5%.