PCF: A High Income Securities Fund In Decline (NYSE:PCF)

PCF Overview

High Income Securities Fund (NYSE:PCF) is a closed-end fund that was taken over by Bulldog Investors in early 2019. Bulldog Investors are known for shareholder activism campaigns on rival CEFs.

Since that time, the strategy with PCF has been to acquire CEFs and BDCs that pay regular distributions that trade at attractive discounts to their NAV. They also allocate up to 20% of the fund to SPACs in a conservative strategy used to boost the income of the fund.

The CEFs they own tend to have their main objective as being income-producing investments. PCF also invests in different parts of the capital structure of CEFs and BDCs, for example, their notes or preferred securities at times. Overall, this strategy’s objective is to produce at least 80% of the portfolio being invested in fixed income, convertible securities, and preferred stocks.

This strategy is laid out on the first page of the PCF 2023 Annual Report. An important part of this is the board believes it is too restrictive, and they are contemplating change. They are examining potentially increasing the fund’s limit on 20% exposure to SPACs and allowing the fund to be able to utilize leverage.

PCF history of the fund with Bulldog Investors

A good summary of how PCF changed in 2019 was recapped in the first page of the PCF 2020 Semi-Annual Report. To summarize, Bulldog investors ran an activist campaign against the board of what was known then as the Putnam High Income Securities Fund. The new trustees conducted a tender offer at close to NAV, shortly after which the fund was left with $52 million in cash.

Since April 2019, the investment strategy I described earlier has been in place.

Other notable events since then have been firstly the change in distribution policy that came into place in 2020. This helped the shares move from a substantial discount to NAV to a small premium in 2021. Secondly, there was a major rights offering, which meant the fund approximately tripled in size from circa $50 million to $150 million.

You can read about the effects of this change in distribution policy and subsequent large rights offerings on the first page of the PCF 2021 Annual Report. To quote from there, “We think this dramatic shift from a discount to a premium is in large part attributable to the Board’s decision to establish a policy to have the Fund pay monthly distributions at an annual rate of at least 10% of the per share NAV as of the last business day of the prior calendar year.”

PCF other fund facts

PCF at the present time now has assets of approximately $130 million, which is comfortably less than I mentioned they had back in 2021. This suggests that they are not sustaining the high distributions by their performance.

As they take a “fund of funds” approach, the expense ratios listed will sometimes include the expenses you are effectively exposed to on the underlying fund holdings. This measure, like some other examples that come to mind I have included in the table below, results in the expense ratio of 3.7%.

Despite PCF undertaking a large capital raising a few years ago, the small fund size of $130 million places pressure on the expense ratio.

PCF fund sector breakdown

The fund disclosures that are available on the PCF website are quite minimal and often include reports that can be 6 months out of date. Keeping that in mind, I shall list how the fund was invested sector-wise at the last balance sheet date of August month end last year.

PCF fund top holdings

The Bulldog Investors SPACs strategy

As mentioned earlier, PCF would like to have the flexibility to invest more than 20% (the old limit they set), in SPACs if they wished to.

SPACs got a huge amount of publicity a few years ago because of a boom in issuance that occurred in the US in 2021, followed by a subsequent bust. This article describes the recent SPACs boom and bust cycle, discussing who were the winners and losers in it all. Some important quotes from this are, “Part of the allure for SPAC investors is the get-out clause allowing them to redeem their initial investment should they not be happy with the target company.”

Then a quote about the losers, “the biggest losers were the ones that held on to their shares through a successful reverse merger, only to see their investment plummet, almost without fail exception.”

To be clear, Bulldog investors have been investing in SPACs for a very long time in a conservative manner. To quote from the 2018 article just linked to, “At worst, it expects its investments to earn Treasury-bill returns if no deal is found.”

PCF fund past performance

Assessing the performance of PCF is not made any easier by the limited disclosure the fund gives investors. Unlike many other CEFs, they do not provide a monthly fact sheet with various data. In terms of the last annual report, it provides some data for periods ending August 31st last year.

Bulldog investors have been running the fund for more than 4 of the 5 years number listed above, so that at least offers some useful information.

Because the current fund strategy has been in place since at some stage in April 2019, I figured it would be useful to check that data out.

PCF vs. SPE performance

You will notice I have included another fund managed by Bulldog Investors in this analysis above, which is the Special Opportunities Fund (NYSE:SPE).

For those interested in learning more about SPE, I covered that fund with articles back in 2018, 2022, and again last year.

Without going too much in-depth in this article, I believe it is interesting to note because its strategy is similar. SPE has had more flexibility and can use leverage, although remember that PCF would like to head in that direction with changes. SPE tends to own more equity CEFs, whereas the CEFs that PCF invests in are often very income-focused.

Given the differences I have mentioned above, one could expect SPE to have an advantage with their flexibility to achieve better returns. SPE has managed to do so over this period above as we can see.

One might point out that SPE is taking more risks to do so, and we can observe more of a drawdown in 2020. Despite that though, I don’t regard SPE as being so much more volatile that you might prefer to tolerate the lower performance of PCF instead.

The above chart incorporates movements in the two funds’ discount to NAV during that time. From the beginning and end of the period though, such factors were not that significant.

The noticeable blip down in late 2021 with the PCF price was around when they announced their plans for a significantly dilutive capital raising. Just prior to that, PCF managed to trade at a premium to NAV for a little while.

PCF fund peers’ analysis

Another fund in which shares similar characteristics as PCF is the Saba Capital Income & Opportunities Fund (NYSE:BRW). I reviewed BRW last year, which also has a mix of CEFs, SPACs and various debt securities to target a similar high yield to PCF.

BRW was taken over by Saba Capital in mid-2021, so I did not place it in the performance chart I featured earlier which went back to April 2019.

Below is a performance chart of PCF, SPE & BRW. I suspect many investors looking for this certain style of fund strategy would often compare these three.

This above analysis incorporates any movements in the discounts / premiums to NAV that may have occurred. I should emphasize that due to this fact, it paints PCF in a harsh light. The starting period above happened to be the rare time when PCF was trading at a premium. Even if I take this into account though, I still find PCF to be the underperformer of the three here.

I would also cut some slack towards PCF in this comparison given they are probably taking the more conservative strategy. I do not find the volatility in the three differ enough though to make PCF more attractive due to such reason.

It does not surprise me that BRW has performed the best of the above three. They have been far busier than Bulldog Investors with activism campaigns on rival CEFs in recent years.

The future of PCF & SPE under Bulldog Investors

With both of these CEFs trading at sizeable discounts to NAV, it is an awkward issue facing the manager. Good returns have been hard to come by over the last few years. The last PCF annual report discussed a strategy move that would make it more resemble the SPE strategy.

Arguably both funds are subscale, so on that basis perhaps a merger might make sense, but I would not bet on that happening, though. I am not sure whether Bulldog Investors are too concerned about the current discounts of their funds. They have tried modest buybacks without much impact. They did not hesitate back in 2021 in arranging their heavily dilutive rights issue with PCF also.

If some consolidation were to take place in the future though, it could be a positive to see their strategies under one vehicle with more scale.

PCF fund discount to NAV

Even though in mid-2021 PCF managed to trade at a premium to NAV, there is a risk that the discount widens even further here. I could easily see it trading at the same wide discount SPE has been at for a long time.

Conclusion

The PCF high-income strategy has not performed very well in recent years. Likewise, the similar strategies employed by Bulldogs Investors’ other fund in SPE have not done much better over longer periods.

PCF trades at a discount of circa 12% lately, and CEFs in general are trading at reasonably wide discounts themselves. Due to these factors, I might almost be able to make a case that one could hold. I do, however, think there are better alternatives out there. Given that nearly all assets have had a good run since late October last year (PCF included), I consider PCF more of a sell right now.

Saba Capital’s BRW, as I discussed, has been busier on the activism front in recent years with similar characteristics to PCF. If I was holding PCF and I liked this type of strategy, I would prefer to switch into BRW. Also, if I wanted to stick with Bulldog Investors, I would rather be invested in SPE instead. This tends to trade at a large discount, and likely to perform better than PCF with not much more volatility.