The PIMCO closed-end fund suite is well-regarded in the market for the depth of its expertise and track record in generating strong returns. Sometimes, however, the price that investors are asked to pay for the brand is too high. The PIMCO California Municipal Income Fund III is a case in point with the fund trading currently at a premium of 25%.

With a sector yield of around 5%, the fund needs to deliver alpha of around 2% a year in order to justify its valuation. This is simply not the case. In the table below we show Gross NAV Returns (GNR) of PZC as well as 5 top funds in the sector. While the GNR of PZC is significantly higher of the sector average (6.9% vs 4.8%), it is not significantly higher of the top 5 funds.

In order to control for leverage and volatility (a proxy for the riskiness of the underlying portfolio), we divide the GNR by these two figures. We show that on this metric, PZC is well below the top 5 funds. In fact PZC only earns a spot at 29 across the entire sector.

In the near term we plan to develop a screen that ranks the entire CEF universe on this metric in order to help investors gauge alpha in the space.

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