Published:
November 14, 2007
The Nicholas-Applegate
Convertible & Income Fund's
(NYSE: NCV, $12.78) $1.5 billion
portfolio is divvied up between
convertible bonds (54%), high-yield
bonds (44%), and cash (2%). An
average credit quality of BB- puts
the portfolio one rung below
investment grade, although roughly a
third of its assets rank as
investment grade.
Top holdings include a $34 million
stake in a high-quality, Triple
A-rated convertible bond issued by
smokeless tobacco and wine maker UST
(NYSE: UST), a $25 million position
in the convertible preferred shares
of power generator NRG Energy (NYSE:
NRG), and another $25 million
holding in an investment-grade
convertible of Canadian insurance
giant Fortis (TSX: FTS-UN.TO).
The portfolio carries an average
yield of 9%, and the fund juices
returns by leveraging (borrowing
against) about a third of its assets
by issuing short-term preferred
shares.
NCV has paid a regular dividend
of $0.125 per share every month
since inception in 2003. It also
dishes up a year-end capital gains
payout. With a total payment of
$1.50 over the past 12 months, the
fund offers a yield of 11.5%.
A management fee of 1.27% of the
fund's asset value trims your total
returns. Most of last year's
dividend was taxed as ordinary
income, but about 19% qualified for
the reduced dividend tax rate and
12% as long-term capital gains,
taxable at the 15% rate.
Allianz Global Investors fund
managers maintain a dividend
reinvestment program, and you can
contact them at 1-800-331-1710.
Nicholas-Applegate Convertible &
Income Fund has produced total returns
(including distributions) of around
+12% annually over the past three
years, beating more than a third of
the funds in its category. So far
this year, the portfolio has grown a
healthy +9% with reinvested
dividends. But investors grew wary
of high-yield investments like NCV
in the aftermath of this summer's
subprime mortgage crisis. As a
result, the fund's market value
returns with reinvested dividends
are far lower at -5% year-to-date.
The shares were trading at a premium
for a year and a half -- until they
nose-dived this summer amid the
subprime mortgage meltdown. They can
now be scooped up at a -4.3%
discount, giving you a dollar's
worth of assets for just 96 cents.
Action To
Take ---> Given its
growing portfolio, the fund should
continue providing steady
double-digit returns over the long
term. The discounted share price may
provide an opportune entry point for
an investor seeking a steady income
stream and willing to tolerate some
volatility in the share price.

Carla Pasternak
Editor
High-Yield
Investing
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