PDO: The New PIMCO Kid On The Block

The PIMCO Dynamic Income Opportunities Fund (PDO) – a $2bn taxable multi-sector CEF – started trading this week

What a bad time to do a CEF IPO! The first day of trading the S&P 500 fell 2.5%. No doubt investors who participated in the IPO were eyeing the price nervously and, by the looks of it, pulled the trigger and hit the sell button as the fund traded down to $19.90.

My view here was that buying around the open was a pretty attractive proposition.

This got some pushback because of a general rule-of-thumb of not buying CEF IPOs. The rule-of-thumb exists for two historic reasons. First, CEFs used to pay for the IPO fees out of the NAV so the fund would be offered out of the gate at a ~5% premium which then deflated over time to a discount. And secondly, most funds traded at discounts so even buying at a flat discount didn’t make sense. None of these apply to PDO where its sister funds are trading at premiums and PIMCO is shouldering the IPO fees. It’s always worth understanding when investing rules-of-thumb no longer work.

The “comps” of PDO were trading at an average premium of around 10% which certainly made it a good deal at a zero premium.

My feeling is that the fund is going to be a PCI/PDI clone. This is due to a number of clues. First, the fund’s MBS focus. Secondly, its similarly soft 50% leverage cap (see prospectus). And thirdly, its fee of 1.15% on total assets (not cheap) which is identical to that of PCI and PDI and well above those of the other funds.

Thanks for reading.

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