With regard to the average annual total return (income yield + percent change in principal) going forward, what do YOU expect to make?
I read the SA article and was not impressed.
JMO, but it was a typical cheerleader piece. It tout the pluses and ignored the minuses.
NCZ, one year (7/9/2014 to 7/9/2015) TOTAL Return.
Total Return = Income Yield + % Change in Capital
Total Return = ( 12 * $0.085 / $9.96 ) + ( $7.34 / $9.96 - 1 )
Total Return = 10.24% - 26.31%
Total Return = -16.06%
Making an income return of 10% on your paid in capital is great, but not if you have to give up 26% of your principal to get it.
I seriously doubt that the drop in NCZ's price has anything to do with the current situation in Greece. It has, IMO, everything to do with the drop in the net asset value of the portfolio, XNCZX. Folks are simply reacting, correctly, to apparent portfolio losses due principally to energy (go read the section of the 28Feb2015 annual report that starts: "One of the most influential factors in the second half of 2014 was the drop in oil prices."). The net asset value decline actually began roughly, ONE year ago. July 2014 looks like it was the onset of the decline. Look at a two year chart for XNCZX (if you must, superimpose NCZ, the price, on the chart, but look at the NET ASSET VALUE). The big question is, will the losses be temporary or permanent?
Since, cabets54, can't, or won't, answer my question, I'll now ask you.
Your best guesstimate, please.
Going forward, over the next decade, what AVERAGE annual total return (income yield + percent change in principal) do YOU believe you'll make on NCZ?
« I'll guess 7 percent »
That's actually a good answer. According to AllianzGI, the annualized total return since inception (7/31/2003 to 5/31/2015) has been 7.16%. If that is based on your own thinking, I'm even more impressed, because it shows me that you are thinking beyond the immediate income yield and are willing to acknowledge that capital losses need to be taken into consideration as well.
I'll try, one last time, to argue that it is oil, not Greece, that is behind the drop in both the NAV and the price.
Using Yahoo's Interactive Charts, request a one year chart for XNCZX. Using Comparison, overlay charts for the S&P 500 and the following two oil companies: XOM & CVX. Can you see that XNCZX, NCZ's net asset value, is tracking the decline in the two oil companies?
The big question is: are the energy related securities in the portfolio permanently, or just temporarily, impaired?
« Foolish question regarding average returns over the next decade. »
I can't hope to predict what will happen in a day, a week, a month, or a year, but when you project out over a decade some things begin to gel.
Is it unreasonable to assume that a junk bond's portfolio might earn 8%?
That leveraging that by 50% might push the income yield out to 12%?
That junk's historical default rate of 4.1% per year still holds?
That leveraging that by 50% might push your capital losses out to 6% per year?
That over a period of a decade your net annual total return might average 6% (12% income - 6% capital losses)?
As always just my opinions.
I'm having a hard time buying into the sustainability of the current distribution at $0.085 per share per month.
#1, According to their most recent annual report, net investment income for the year ended 28Feb2015 was $0.80, that's ~$0.067 per share per month.
#2, According to their latest section 19 notice: "The Fund’s previously declared (June 1, 2015) distribution of $0.085 per common share was paid or reinvested on July 1, 2015 to shareholders of record on June 11, 2015. Fund Management estimates $0.06892 per common share of this distribution is from net investment income and $0.01608 is from paid-in capital in excess of par."
Although I've never been a fan of junk, I have recently found the arithmetic behind NCZ fascinating (in particular, the negative growth rate). I've put some effort into trying to understand it and would even considering taking a small position at the right price. But I'm having no luck talking the cheerleaders into lowering their bids. In a weird sort of way, it would be a nice complement to BRK in a taxable account for someone (not me) who wants to own BRK but also needs some income, AND also wants to offset some of the capital gains tax on BRK when they sell it in the future. As best as I can tell, selling NCZ some day in the future will very likely yield a significant capital loss.
Admittedly, it is a mix of Junk & Converts, so it isn't as simple as I make it out to be. As far as I can see, the only thing that accrues from year to year is the capital losses (defaults). The income and realized capital gains are paid out and no new money has been added since inception. At inception, 7/31/2003, the Price & NAV were: $15.00 and $14.33. Today, almost 12 years later, it closed at $7.21 (NCZ) and $7.08 (XNCZX). More than half of the initial money has vaporized. But the good news is you're being paid very well, about 12% of NAV, to shoulder the losses. So if you make ~12% in current (but declining) income and loss ~6% a year in capital, you should net about 6% and when you do finally sell it, you'll probably be a able to report a whopping capital loss.
The onset of the decline in NCZ's NAV began a year ago, and appears to be related to the drop in the price of oil. It looks like things will only get worse in the near future if a certain country (one of the top five producers) adds its oil to the market.
This stuff is all new to me, so please feel free to correct my misconceptions.
« WHY would the price of oil hurt these holdings that much ? »
Read the detailed paragraph in their 28Feb2015 AR (page 4) that begins with:
"One of the most influential factors in the second half of 2014 was the drop in oil prices."
From a different source, Ara Lovitt, in his GMO white paper, "What Do High-Yield Maturities Tell Us
About Timing the Credit Cycle? Another Take on the Wall" noted that:
"The handful of recent bankruptcies in the energy sector in 2015 illustrate this point. These energy
companies filed for bankruptcy because the unexpected and dramatic decline in the price of oil
pressured their cash flows, not because they were unable to redeem debts as they came due. In fact,
one of these companies, American Eagle Energy Company, filed for bankruptcy after missing the
first coupon on a bond it issued a mere seven months earlier, making it a recent winner of the credit
market’s version of the NCAA (as in “No Coupon At All”). While extreme, this example shows that
often companies default years before their debts technically mature.
« did u listen to the conference calls ? »
No, I'm medically deaf without my cochlear implant (one side) and listening on a telephone via the telecoil is too stressful.
#3. Based on my interpretation of the data on the "About this Fund" and the "Portfolio" tabs on the AllianzGI web site for NCZ, my best guess is that a distribution per share per month greater than $0.064 would be a stretch.
Rationalization: As of 30Jun2015, 43.08% of the portfolio was invested in convertibles with an average yield of 6.72% and 41.67% was invested in High Yield with an average yield of 9.11%. That implies that 84.75% of the investment portfolio has a weighted average yield of about 7.90%. I'll assume that the remaining 15.15% of the fund (Derivatives, Liquidity and Equity) is no better or worse than that and use 7.90% for the entire portfolio. That suggests that, net of fund fees (the expense ratio) on the common, the portfolio should earn about 57.3 M$ per year: 7.90% x $804.5 M$ -1.18% x 530.5 M$. If we divide that by 74.225230 million common shares outstanding and divide again by twelve (to convert annual income to monthly), that would suggest that the monthly per share distribution should really be about $0.064.
My expectation is that sometime in the very near future (September?) the fund will reset the monthly distribution per share to something considerable lower than $0.085.
As always, just my opinion.
No, I don't bet, at least not in the "day trader" sense of the word. IF I invest in this at all, it will be for the stream of payments it provides over a 3 to 7 year holding period. I have no interest whatsoever in paying ~$7 for something I believe is only worth ~$6.
I'll have to keep an eye on this one. The 0.48% expense ratio isn't terrible, Vanguard charges 0.42% for their managed payout fund. Weeding out the squatters (the non-dividend payers) and capping any individual stock at a maximum portfolio weight of 5% might actually be worth the fee (Mr. Wonderful's royalty?).
My buy-in target (IF I buy at all) is just a bit south of $6. I believe, to avoid a return of capital, they'll probably have to reset the monthly distribution per share from the current $0.085 to ~$0.065 (in September?, their FY ends in February). I am willing to wait and see.
IMO, NAV and Book Value are very similar concepts. Stand alone, their both meaningless. The premium/discount (to NAV) or multiple (to BV) a rational investor should be willing to pay should depend on how much distributable cash the investment generates today and the investor's expectations regarding it's future rate of change.
« What is it about this particular fund that attracted your attention? »
Last November (Nov 8, 2014 6:45 PM) some poor, disillusioned cheerleader, who was hoping, no doubt, (in my opinion) to prop the price up, made the mistake of posting the following on the IBM message board:
« Retirees. Looking for a dividend paying stock yielding 11%
Dividends payed monthly. The stock is ncz and it is traded on the nyse. »
Not being a believe in free lunches, it piqued my curiosity.
I found the negative growth rate absolutely fascinating, and the idea that something that pays you very well even while it slowly dies could still be a good investment.
I very likely won't buy it. IMO you need to trade it very carefully, i.e., buy it after, and then sell it before, a step down. It would not be a something to leave for my wife to have to sort out after I'm gone. I'm much more interested in OUSA now, but I need to see the first dividend. I'm guesstimating ~$0.20 per share quarter. I also want some specs (P/E, D/E, growth rate, etc.). I see OUSA as something to buy instead of the 500, but only after a correction.
« ... amazing punishment for retail investors. »
Yes, and incurable optimists that they are, they appear to be pricing in ONLY a one cent decrease in the monthly distribution per share on a future reset.
V/s = 12 x ( $0.085 - $0.010 ) / 13% = $6.92
Yesterday's closing P/s = $6.93
I did take a look at their recent Form N-Q over on the SEC. One of their holdings, Arch Coal, Inc., 9.875%, 6/15/19, appears to have a YTM of ~68%. To understand why, search for : « Arch Coal in Trouble: Will Reverse Stock Split Help? ».
« How low does COP go? »
Take a look at the following article in today's BARRON'S: "Low Oil Prices Squeeze Energy Dividends".
" ... ConocoPhillips (COP) offered a token 1% bump along with cuts in spending. “They have the ability to reduce capital spending significantly over the next three to four years if current commodity prices sustain,” says Dowd."
"But according to a recent note from Oppenheimer & Co., if prices remain below $60 a barrel for a prolonged period, payouts across the sector could come under the gun. “At this low price, all oil companies are funding their dividend through additional borrowing or asset sales, and even the majors could be forced to freeze or cut their dividend,” wrote Oppenheimer."
IMO, it isn't a fear of increasing interest rates that is causing the drop in NCZ's NAV/s, it's the drop in the selling prices (and thus, the profits) of the stuff that funds the portfolio's creditors' coupons. As of 6/30/2015, NCZ's Portfolio Leverage-Adjusted Duration was only 2.53% years, which is similar to a short-term "bond" or note. Not a big deal.
To see the problem visually, bring up a Yahoo Charts, Interactive, 2 year graph for XNCZX (NCZ's NAV/s). For comparison, add DBC (a basket of commodities) and OIL (an ETF that tracks West Texas Crude Oil). Now, change the date range to: starts, 01/01/2014 and ends, 07/24/2015. It looks like NCZ's NAV 18.51% decrease over that period is tracking the decreases in commodity prices (36.18%) and the price of oil (57.55%).
As always, just my opinions.