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New CEF IPO – PIMCO Income Fund (PDI)

June 7, 2012

PIMCO raised $1,015,000,000 in its initial public offering of 40,600,000 common shares last week. This is the largest CEF IPO this year – in fact, the largest since Tortoise MLP Fund (NTG) raised $1,060,000,000 in July of 2010.

This is a much needed confidence booster to the CEF IPO market as the previous 17 months have seen bellow average CEF IPO raises: $315M in 2011 and before PDI’s launch we have only averaged $294M in new CEF IPOs for 2012 YTD. For comparison purposes, from 2003-2007 we averaged $540M per IPO with 41 new funds raised per year on average.

PDI’s Investment Objective:  The Fund seeks current income as a primary objective and capital appreciation as a secondary objective. The Fund seeks to achieve its investment objectives by utilizing a dynamic asset allocation strategy among multiple fixed-income sectors, including non-agency residential and commercial mortgage-backed securities (and any other mortgage-related or asset-backed securities), investment-grade corporate bonds and below investment-grade securities (commonly referred to as “high yield” securities or “junk bonds”) and certain other income-producing securities of U.S. and foreign issuers.

As a matter of fundamental policy, the Fund will normally invest at least 25% of its total assets in privately-issued (commonly known as “non-agency”) mortgage-related securities. It is anticipated the Fund will utilize leverage as part of its investment strategy.

CEF Advisor’s Commentary: At our firm, we use a research approach primarily based on how a fund trades in relation to its NAV (over a 90 day period of time), the level of income cushion either in the undistributed net investment income (UNII) data or earning ratio (fund earnings divided by fund distribution).  We also review what the fund is doing from a net asset value (NAV) performance perspective (total return) and the current dividend policy and distribution amount per share via its market price. These factors make it rare for us to buy a fund with less than a 90 day history and before its first distribution announcement. From that perspective, we do not participate in CEF IPOs.

We think that the fund has a bright future ahead with a solid portfolio management team and plenty of assets to keep liquidity available to investors. While rates are surely to rise at some point in the future, the closed-ended structure will help protect bond investors from long-term losses which might be experienced by their open-fund counterparts. The reason is that redemption pressures can cause a fund manager to sell bonds to redeem shares and not due to investment related decisions.  A closed-end fund can have more volatility in the short term, but we find that long term total return performance of the NAV benefits from the permanent capital structure (and for bonds, the ability to add leverage).

Current Price & Volume: The fund closed trading on June 6 at $25.77 and has averaged 191K in share volume each day ($4.9M in dollars traded). A dividend is yet to be announced.

Peer Fund Comparison: According to the data we track in our weekly CEF Universe report (www.cefuniverse.com) as of June 1, 2012  the average Taxable Bond CEF (153 total funds) had an average:

Premium to NAV: +0.46%
Income-Only Yield: 7.1%
Total Yield of 7.7%
Leverage: 20%
Net Assets: $366M
Daily Trading $: $1.136M
Earning Coverage Ratio: 86%
Relative UNII: +2.67%

We look forward to tracking this new fund and welcome it to the US closed-end fund world.

Read Full Press Release Here: http://www.businesswire.com/news/home/20120530006655/en/PIMCO-Dynamic-Income-Fund-Announces-Closing-Initial

Disclosures: Past performance is not indicative of future results.

This material may include statements that constitute “forward-looking statements” under the U.S. securities laws. Forward-looking statements include, among other things, projections, estimates and information about possible or future results related to the Fund, market or regulatory developments. The views expressed herein are not guarantees of future performance or economic results and involve certain risks, uncertainties and assumptions that could cause actual outcomes and results to differ materially from the views expressed herein. The views expressed herein are subject to change at any time based upon economic, market, or other conditions and the Fund undertakes no obligation to update the views expressed herein. While we have gathered this information from sources believed to be reliable, the Fund cannot guarantee the accuracy of the information provided. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. The views expressed herein (including any forward-looking statement) may not be relied upon as investment advice or as an indication of the Fund’s trading intent. Information included herein is not an indication of the Fund’s future portfolio composition.

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