PDO: A Contrarian Take

This is my second post in a row on PDO – it’s been a focus for subscribers on the service. Unfortunately, there is not much information to go on but the fund should be in the PCI/PDI mold given its mortgage mandate and fee structure.

The fund is trading at the lowest premium across the taxable suite. This is likely for a couple of reasons. First, many investors have not discovered the fund and secondly, those who got the fund at the IPO are likely monetizing a quick 1-2% gain.

Big picture, the fund is pretty attractive here as I would expect its premium to converge with the rest of the suite. However, in every call it’s important to state the opposing view and how the base case can go awry.

The contrarian view here is that the PDO premium could very well remain depressed. It is possible that PDO will continue to trade at the lowest premium in the suite for a couple of reasons. Income investors like to buy funds that 1) have rarely/never cut, 2) show the best historic returns. PDO doesn’t have a track record so investors may shun it.

Is this a problem? Well, it’s a problem in the sense of delivering slower price gains. However, one potential advantage of this for investors is that they don’t need to rush as quickly to build a full position on PDO and can wait for a market pause. Investors who got into half of their position when it started trading at around $19.90 – 20.03 don’t need to rush to scale all the way up at the current price.

Thanks for reading.

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