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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Pimco Income Strategy Fund II

November 26th 2010 Pimco Income Strategy Fund II
NYSE Symbol: PFN
Industry: Floating rate bonds
Price as of 11/26: $ 10.20

I hope everyone had a great Thanksgiving. Typically the markets are in a joyful mood pushing the major averages higher this week, but not so this year. Credit concerns in Europe and increased tensions between North and South Korea has left the buyers on the sidelines. The Fed is busy executing their quantitative easing plan to keep rates low, however, interest rates have actually crept higher. With rates at or near zero, they actually have nowhere to go but up. The big losers with be Treasury bonds. When bond yields push higher, the price will go lower. Anyone who holds their bonds to maturity will be fine, but bond funds will be tricky since there is no maturity date. Many investors don't realized how volatile bonds prices are or that you can lose money if sold before maturity, so investing in bond funds can be just as risky as stock funds. But there are certain bonds that typically perform well as the economy improves like corporate bonds and others. This week we'll feature a floating rate bond fund that typically performs well when interest rates move higher. The fund of the week is Pimco Income Strategy Fund II. The President and founder of Pimco, Bill Gross has recommended the Pimco Income Strategic Fund and his Corporate Opportunity Funds a number of times this year. Bill Gross has also put his money where his mouth is investing millions of his own money into these two funds earlier this year. We featured the Pimco Corporate Opportunity Fund two years ago. The fund was yielding 15% back then and has since rallied 73% not including the dividends which easily put it over 100%. Who needs high flying techs? The Pimco Income Strategic Funds has performed just as well and should continue to rally as the US economy improves and interest rates inevitably push higher.
Another reason to look at the Pimco closed end funds this time of year is because, not only do the funds go ex-dividend around the 9th of December, but last year the funds also paid out an additional capital gains dividend that in some cases doubled the annual dividend. This second dividend comes later in December and has not yet been disclosed. There is a good chance the capital gains dividend will not be as large as last year, but any dividend boosts the already high 7% to 8% yields.
For full disclosure, I personally have been buying the Pimco Income Strategy Fund II for my own client accounts.