UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-21189
PIMCO New York Municipal Income Fund III
(Exact name of registrant as specified in charter)
1633 Broadway, New York, NY 10019
(Address of principal executive offices)
Bradley Todd
Treasurer (Principal Financial & Accounting Officer)
650 Newport Center Drive
Newport Beach, CA 92660
(Name and address of agent for service)
Copies to:
David C. Sullivan
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, MA 02199
Registrant’s telephone number, including area code: (844) 337-4626
Date of fiscal year end: December 31
Date of reporting period: June 30, 2020
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
| Item 1. | Reports to Shareholders. |
The following is a copy of the report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30e-1).
PIMCO CLOSED-END FUNDS
Semiannual Report
June 30, 2020
PIMCO New York Municipal Income Fund III | PYN | NYSE
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from the Fund or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on the Fund’s website, pimco.com/literature, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund electronically by visiting pimco.com/edelivery or by contacting your financial intermediary, such as a broker-dealer or bank.
You may elect to receive all future reports in paper free of charge. If you own these shares through a financial intermediary, such as a broker-dealer or bank, you may contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. If you invest directly with the Fund, you can inform the Fund that you wish to continue receiving paper copies of your shareholder reports by calling 844.337.4626. Your election to receive reports in paper will apply to all funds held with the fund complex if you invest directly with the Fund or to all funds held in your account if you invest through a financial intermediary, such as a broker-dealer or bank.
Table of Contents
Letter from the Chair of the Board & President
Dear Shareholder,
We hope that you and your family are staying safe and healthy during these challenging times. We continue to work tirelessly to navigate markets and manage the assets that you have entrusted with us. Following this letter is the PIMCO New York Municipal Income Fund III Fund’s Semiannual Report, which covers the six-month reporting period ended June 30, 2020. On the subsequent pages, you will find specific details regarding investment results and discussion of the factors that most affected performance during the reporting period.
For the six-month reporting period ended June 30, 2020
The coronavirus took its toll on the U.S. economy, as it entered its first recession since the 2008 financial crisis. Looking back, U.S. gross domestic product (“GDP”) grew at a revised annual pace of 2.6% and 2.4% during the third and fourth quarters of 2019, respectively. The pandemic then caused the economy to significantly weaken, as annualized GDP growth in the first quarter of 2020 was -5.0%. The Commerce Department’s initial estimate for second quarter annualized GDP growth — released after the reporting period ended — was -32.9%. This represented the sharpest quarterly decline on record.
The Federal Reserve (the “Fed”) took unprecedented actions to support the economy and keep markets functioning properly. In early March 2020, the Fed lowered the federal funds rate to a range between 1.00% and 1.25%. Later in the month, the Fed lowered the rate to a range between 0.00% and 0.25%. On March 23, the Fed announced, “It has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.” The Fed’s efforts included the ability to make unlimited purchases of Treasury and mortgage securities. It also announced that, for the first time, it would purchase existing corporate bonds on the open market. In addition, the U.S. government passed a $2 trillion fiscal stimulus bill to aid the economy in March.
In its June 2020 World Economic Outlook Update, the International Monetary Fund (“IMF”) stated that it expects the U.S. economy to contract 8.0% in 2020, compared to the 2.3% GDP expansion in 2019. Elsewhere, the IMF has also stated that it anticipates that 2020 GDP growth in the eurozone, U.K. and Japan will be -10.2%, -10.2% and -5.8%, respectively. For comparison purposes, the GDP of these economies expanded 1.3%, 1.4% and 0.7%, respectively, in 2019.
Both short- and long-term U.S. Treasury yields fell sharply during the reporting period. In our view, this was due to a combination of declining global growth given the coronavirus, the Fed’s accommodative monetary policy and periods of extreme investor risk aversion. The yield on the benchmark 10-year U.S. Treasury note was 0.66% at the end of the reporting period, versus 1.92% on December 31, 2019. The
Bloomberg Barclays Global Treasury Index (U.S. Dollar Hedged), which tracks fixed-rate, local currency government debt of investment grade countries, including both developed and emerging markets, returned 4.30%. Meanwhile, the Bloomberg Barclays Global Aggregate Credit Index (U.S. Dollar Hedged), a widely used index of global investment grade credit bonds, returned 3.43%. Riskier fixed income asset classes, including high yield corporate bonds and emerging market debt, generated weaker results. The ICE BofAML Developed Markets High Yield Constrained Index (U.S. Dollar Hedged), a widely used index of below investment grade bonds, returned -4.64%, whereas emerging market external debt, as represented by the JPMorgan Emerging Markets Bond Index (EMBI) Global (U.S. Dollar Hedged), returned -1.87%. Emerging market local bonds, as represented by the JPMorgan Government Bond Index-Emerging Markets Global Diversified Index (Unhedged), returned -6.89%.
The municipal (or “muni”) market generated choppy results, posting positive returns during four of the six months of the reporting period. As was the case with the taxable U.S. bond market, munis were supported by falling interest rates. However, a portion of its gains were lost in March and April 2020, in our view, due to concerns about market liquidity and municipal finances. All told, the Bloomberg Barclays Municipal Bond Index returned 2.08% during the six months ended June 30, 2020.
Thank you for the assets you have placed with us. We deeply value your trust, and we will continue to work diligently to meet your broad investment needs. For any questions regarding your PIMCO Closed-End Funds investments, please contact your financial advisor, or call the Fund’s shareholder servicing agent at (844) 33-PIMCO. We also invite you to visit our website at www.pimco.com to learn more about our global viewpoints.
Sincerely,
| | |
 | |  |
| |
 | |  |
| Deborah A. DeCotis | | Eric D. Johnson |
| Chair of the Board of Trustees | | President |
Past performance is no guarantee of future results. Unless otherwise noted, index returns reflect the reinvestment of income distributions and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an unmanaged index.
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| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 3 |
Important Information About the Fund
We believe that bond funds have an important role to play in a well-diversified investment portfolio. It is important to note, however, that in an environment where interest rates may trend upward, rising rates would negatively impact the performance of most bond funds, and fixed-income securities and other instruments held by the Fund are likely to decrease in value. A wide variety of factors can cause interest rates or yields of U.S. Treasury securities (or yields of other types of bonds) to rise (e.g., central bank monetary policies, inflation rates, general economic conditions). In addition, changes in interest rates can be sudden and unpredictable, and there is no guarantee that Fund management will anticipate such movement accurately. The Fund may lose money as a result of movement in interest rates.
As of the date of this report, interest rates in the U.S. and many parts of the world, including certain European countries, are at or near historically low levels. Thus, the Fund currently faces a heightened level of risk associated with rising interest rates and/or bond yields. This could be driven by a variety of factors, including but not limited to central bank monetary policies, changing inflation or real growth rates, general economic conditions, increasing bond issuances or reduced market demand for low yielding investments. Further, while bond markets have steadily grown over the past three decades, dealer inventories of corporate bonds are near historic lows in relation to market size. As a result, there has been a significant reduction in the ability of dealers to “make markets.”
Bond funds and individual bonds with a longer duration (a measure used to determine the sensitivity of a security’s price to changes in interest rates) tend to be more sensitive to changes in interest rates, usually making them more volatile than securities or funds with shorter durations. In addition, in the current low interest rate environment, the market price of the Fund’s common shares may be particularly sensitive to changes in interest rates or the perception that there will be a change in interest rates. All of the factors mentioned above, individually or collectively, could lead to increased volatility and/or lower liquidity in the fixed income markets or negatively impact the Fund’s performance or cause the Fund to incur losses.
Classifications of the Fund’s portfolio holdings in this report are made according to financial reporting standards. The classification of a particular portfolio holding as shown in the Allocation Breakdown and Schedule of Investments sections of this report may differ from the classification used for the Fund’s compliance calculations, including those used in the Fund’s prospectus, investment objectives, regulatory, and other investment limitations and policies, which may be based on different asset class, sector or geographical classifications. The Fund is separately monitored for compliance with respect to prospectus and regulatory requirements.
The geographical classification of foreign (non-U.S.) securities in this report, if any, are classified by the country of incorporation of a holding. In certain instances, a security’s country of incorporation may be different from its country of economic exposure.
Beginning in January 2020, global financial markets have experienced and may continue to experience significant volatility resulting from the spread of a novel coronavirus known as COVID-19. The outbreak of COVID-19 has resulted in travel and border restrictions, quarantines, supply chain disruptions, lower consumer demand and general market uncertainty. The effects of COVID-19 have and may continue to adversely affect the global economy, the economies of certain nations and individual issuers, all of which may negatively impact the Fund’s performance. In addition, COVID-19 and governmental responses to COVID-19 may negatively impact the capabilities of the Fund’s service providers and disrupt the Fund’s operations.
The United States presidential administration’s enforcement of tariffs on goods from other countries, with a focus on China, has contributed to international trade tensions and may impact portfolio securities.
The United Kingdom’s withdrawal from the European Union may impact Fund returns. The withdrawal may cause substantial volatility in foreign exchange markets, lead to weakness in the exchange rate of the British pound, result in a sustained period of market uncertainty, and destabilize some or all of the other European Union member countries and/or the Eurozone.
The Fund may invest in certain instruments that rely in some fashion upon the London Interbank Offered Rate (“LIBOR”). LIBOR is an average interest rate, determined by the ICE Benchmark Administration, that banks charge one another for the use of short-term money. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced plans to phase out the use of LIBOR by the end of 2021. The transition may result in a reduction in the value of certain instruments held by the Fund or a reduction in the effectiveness of related Fund transactions such as hedges. There remains uncertainty regarding future utilization of LIBOR and the nature of any replacement rate (e.g., the Secured Overnight Financing Rate, which is intended to replace U.S. dollar LIBOR and measures the cost of overnight borrowings through repurchase agreement transactions collateralized with U.S. Treasury securities), and any potential effects of the transition away from LIBOR on the Fund or on certain instruments in which the Fund invests are not known and could result in losses to the Fund.
Under the direction of the Federal Housing Finance Agency, the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”) have entered into a joint initiative to develop a common securitization platform for the issuance of a uniform mortgage-backed security (the “Single Security Initiative”) that aligns the characteristics of FNMA and FHLMC certificates. The Single Security Initiative was implemented on June 3, 2019, and the effects it may have on the market for mortgage-backed securities are uncertain.
Investing in the municipal bond market involves the risks of investing in debt securities generally and certain other risks. The amount of public information available about the municipal bonds in which the Fund may invest is generally less than that for corporate equities or bonds, and the investment performance of the Fund’s investment in municipal bonds may therefore be more dependent on the analytical abilities of PIMCO than its investments in taxable bonds. The secondary market for municipal bonds also tends to be less well-developed or liquid than many other securities markets, which may adversely affect the Fund’s ability to sell its bonds at attractive prices.
The ability of municipal issuers to make timely payments of interest and principal may be diminished during general economic downturns, by litigation, legislation or political events, or by the bankruptcy of the issuer. Issuers of municipal securities also might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, the Fund could experience delays in collecting principal and interest and the Fund may not, in all circumstances, be able to collect all principal and interest to which it is entitled.
A fund that has substantial exposures to New York municipal bonds may be affected significantly by economic, regulatory or political developments affecting the ability of New York issuers to pay interest or repay principal. While New York’s economy is broad, it does have concentrations in the financial services industry, and may be sensitive to economic problems affecting that industry.
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| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 5 |
Important Information About the Fund (Cont.)
Certain issuers of New York municipal bonds have experienced serious financial difficulties in the past and reoccurrence of these difficulties may impair the ability of certain New York issuers to pay principal or interest on their obligations. The financial health of New York City affects that of the State, and when New York City experiences financial difficulty, it may have an adverse effect on New York municipal bonds held by the Fund. The growth rate of New York has at times been somewhat slower than the nation overall. The economic and financial condition of New York also may be affected by various financial, social, economic and political factors.
The common shares of the Fund trade on the New York Stock Exchange. As with any stock, the price of the Fund’s common shares will fluctuate with market conditions and other factors. If you sell your common shares of the Fund, the price received may be more or less than your original investment.
Shares of closed-end investment management companies, such as the Fund, frequently trade at a discount from their net asset value (“NAV”) and may trade at a price that is less than the initial offering price and/or the NAV of such shares. Further, if the Fund’s shares trade at a price that is more than the initial offering price and/or the NAV of such shares, including at a substantial premium and/or for an extended period of time, there is no assurance that any such premium will be sustained for any period of time and will not decrease, or that the shares will not trade at a discount to NAV thereafter.
The Fund may be subject to various risks as described in the Fund’s prospectus and in the Principal Risks in the Notes to Financial Statements.
On the Fund Summary page in this Shareholder Report, the Average Annual Total Return table measures performance assuming that all dividend and capital gain distributions were reinvested. Total return is calculated by determining the percentage change in NAV or market price (as applicable) in the specified period. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions. Total return for a period of more than one year represents the average annual total return. Performance at market price will differ from results at NAV. Although market price returns tend to reflect investment results over time, during shorter periods returns at market price can also be influenced by factors such as changing views about the Fund, market conditions, supply and demand for the Fund’s shares, or changes in the Fund’s dividends. Performance shown is net of fees and expenses. Historical NAV performance for the Fund may have been positively impacted by fee waivers or expense limitations in place during some or all of the periods shown, if applicable. Future performance (including total return or yield) and distributions may be negatively impacted by the expiration or reduction of any such fee waivers or expense limitations.
The dividend rate that the Fund pays on its common shares may vary as portfolio and market conditions change, and will depend on a number of factors, including without limit the amount of the Fund’s undistributed net investment income and net short- and long-term capital gains, as well as the costs of any leverage obtained by the Fund. As portfolio and market conditions change, the rate of distributions on the common shares and the Fund’s dividend policy could change. There can be no assurance that a change in market conditions or other factors will not result in a change in the Fund distribution rate or that the rate will be sustainable in the future.
The following table discloses the commencement of operations and diversification status of the Fund:
| | | | | | | | | | | | |
| Fund Name | | | | | Commencement
of Operations | | | Diversification
Status | |
| | | |
PIMCO New York Municipal Income Fund III | | | | | | | 10/31/02 | | | | Non-diversified | |
An investment in the Fund is not a deposit of a bank and is not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency. It is possible to lose money on investments in the Fund.
The Trustees are responsible generally for overseeing the management of the Fund. The Trustees authorize the Fund to enter into service agreements with the Manager and other service providers in order to provide, and in some cases authorize service providers to procure through other parties, necessary or desirable services on behalf of the Fund. Shareholders are not parties to or third-party beneficiaries of such service agreements. Neither the Fund’s original or any subsequent prospectus or Statement of Additional Information (“SAI”), any press release or shareholder report, any contracts filed as exhibits to the Fund’s registration statement, nor any other communications, disclosure documents or regulatory filings from or on behalf of the Fund creates a contract between or among any shareholders of the Fund, on the one hand, and the Fund, a service provider to the Fund, and/or the Trustees or officers of the Fund, on the other hand. The Trustees (or the Fund and its officers, service providers or other delegates acting under authority of the Trustees) may amend its most recent or use a new prospectus or SAI with respect to the Fund, adopt and disclose new or amended policies and other changes in press releases and shareholder reports and/or amend, file and/or issue any other communications, disclosure documents or regulatory filings, and may amend or enter into any contracts to which the Fund is a party, and interpret the investment objective(s), policies, restrictions and contractual provisions applicable to any Fund, without shareholder input or approval, except in circumstances in which shareholder approval is specifically required by law (such as changes to fundamental investment policies) or where a shareholder approval requirement was specifically disclosed in the Fund’s prospectus, SAI or shareholder report and is otherwise still in effect.
PIMCO has adopted written proxy voting policies and procedures (“Proxy Policy”) as required by Rule 206(4)-6 under the Investment Advisers Act of 1940. The Proxy Policy has been adopted by the Fund as the policies and procedures that PIMCO will use when voting proxies on behalf of the Fund. A description of the policies and procedures that PIMCO uses to vote proxies relating to portfolio securities of the Fund, and information about how the Fund voted proxies relating to portfolio securities held during the most recent twelve-month period ended June 30, are available without charge, upon request, by calling the Fund at (844) 33-PIMCO, on the Fund’s website at www.pimco.com, and on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
The Fund files portfolio holdings information with the SEC on Form N-PORT within 60 days of the end of each fiscal quarter. The Fund’s complete schedule of securities holdings as of the end of each fiscal quarter will be made available to the public on the SEC’s website at www.sec.gov and on PIMCO’s website at www.pimco.com, and will be made available, upon request, by calling PIMCO at (844) 33-PIMCO. Prior to its use of Form N-PORT, the Fund filed its complete schedule of its portfolio holdings with the SEC on Form N-Q, which is available online at www.sec.gov.
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| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 7 |
Important Information About the Fund (Cont.)
The SEC adopted a rule that, beginning in 2021, generally will allow shareholder reports to be delivered to investors by providing access to such reports online free of charge and by mailing a notice that the report is electronically available. Pursuant to the rule, investors may still elect to receive a complete shareholder report in the mail. Instructions for electing to receive paper copies of the Fund’s shareholder reports going forward may be found on the front cover of this report.
In November 2019, the SEC published a proposed rulemaking related to the use of derivatives and certain other transactions by registered investment companies. If the proposal is adopted in substantially the same form as it was proposed, these requirements could limit the ability of a Fund to use derivatives and reverse repurchase agreements and similar financing transactions as part of its investment strategies. Any new requirements, if adopted, may increase the cost of the Fund’s investments and cost of doing business, which could adversely affect investors.
In April 2020, the SEC issued a proposed rulemaking setting forth a proposed framework for fair valuation of fund investments. If the proposal is adopted in substantially the same form as it was proposed, the rule would set forth requirements for good faith determinations of fair value, establish conditions under which a market quotation is considered readily available for purposes of the definition of “value” under the Investment Company Act of 1940, and address the roles and responsibilities of a fund’s board of trustees and investment adviser with respect to fair valuation of fund investments. The impact that any such requirements may have on the Fund is uncertain.
On April 8, 2020, the SEC adopted amended rules modifying the registration, communications, and offering processes for registered closed-end funds and interval funds. Among other things, the amendments will: (1) permit qualifying closed-end funds to use a short-form registration statement to offer securities in eligible transactions and certain funds to qualify as Well Known Seasoned Issuers; (2) permit interval funds to pay registration fees based on net issuance of shares in a manner similar to mutual funds; (3) require closed-end funds and interval funds to include additional disclosures in their annual reports; and (4) require certain information to be filed in interactive data format. The new rules have phased compliance and effective dates, with some requirements requiring compliance starting August 1, 2020 and others requiring compliance as late as February 1, 2023.
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| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 9 |
| | |
| PIMCO New York Municipal Income Fund III | | Symbol on NYSE - PYN |
| | | | |
|
| Allocation Breakdown as of June 30, 2020†§ | |
| |
| Municipal Bonds & Notes | | | | |
Income Tax Revenue | | | 15.4 | % |
Tobacco Settlement Funded | | | 9.5 | % |
Ad Valorem Property Tax | | | 8.0 | % |
College & University Revenue | | | 7.4 | % |
Health, Hospital & Nursing Home Revenue | | | 6.5 | % |
Industrial Revenue | | | 6.3 | % |
Water Revenue | | | 6.3 | % |
Highway Revenue Tolls | | | 6.2 | % |
Port, Airport & Marina Revenue | | | 5.2 | % |
Transit Revenue | | | 4.6 | % |
Lease Revenue | | | 4.6 | % |
Miscellaneous Taxes | | | 4.5 | % |
Miscellaneous Revenue | | | 3.8 | % |
Recreational Revenue | | | 2.4 | % |
Sales Tax Revenue | | | 2.4 | % |
Local or Guaranteed Housing | | | 1.2 | % |
Electric Power & Light Revenue | | | 1.1 | % |
Other | | | 1.4 | % |
| Short-Term Instruments | | | 3.2 | % |
| † | | % of Investments, at value. |
| § | | Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any. |
| | | | |
|
| Fund Information (as of June 30, 2020)(1) | |
| |
| Market Price | | | $9.40 | |
| NAV | | | $8.86 | |
| Premium/(Discount) to NAV | | | 6.09 | % |
| Market Price Distribution Rate(2) | | | 4.53 | % |
| NAV Distribution Rate(2) | | | 4.81 | % |
| Total Effective Leverage(3) | | | 44.75 | % |
| | | | | | | | | | | | | | | | |
|
| Average Annual Total Return(1) for the period ended June 30, 2020 | |
| | | | | |
| | | 6 Month* | | 1 Year | | 5 Year | | | 10 Year | | | Commencement
of Operations
(10/31/02) | |
| Market Price | | (0.04)% | | 1.20% | | | 5.95% | | | | 6.33% | | | | 3.62% | |
| NAV | | (2.34)% | | 1.22% | | | 4.82% | | | | 6.34% | | | | 3.59% | |
All Fund returns are net of fees and expenses and include applicable fee waivers and/or expense limitations. Absent any applicable fee waivers and/or expense limitations, performance would have been lower and there can be no assurance that any such waivers or limitations will continue in the future.
| (1) | | Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Total return, market price, NAV, market price distribution rate, and NAV distribution rate will fluctuate with changes in market conditions. Performance current to the most recent month-end is available at www.pimco.com or via (844) 33-PIMCO. Performance is calculated assuming all dividends and distributions are reinvested at prices obtained under the Fund’s dividend reinvestment plan. Performance does not reflect any brokerage commissions in connection with the purchase or sale of Fund shares. |
| (2) | | Distribution rates are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (“ROC”) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income in accordance with its policies and good accounting practices, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the estimated composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January. |
| (3) | | Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of auction rate preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage). |
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| 10 | | PIMCO CLOSED-END FUNDS | | | | |
| | |
| PIMCO New York Municipal Income Fund III | | Symbol on NYSE - PYN |
Investment Objective and Strategy Overview
PIMCO New York Municipal Income Fund III’s investment objective is to seek to provide current income exempt from federal, New York State and New York City income tax.
Fund Insights at NAV
The following affected performance (on a gross basis) during the reporting period:
| » | | The Fund’s duration exposure contributed to performance, as municipal yields declined across the curve. |
| » | | Security selection within the tobacco sector contributed to performance, as the Fund’s holdings outperformed the general municipal market. |
| » | | Exposure to the education sector contributed to performance, as the sector outperformed the general municipal market. |
| » | | Security selection within the special tax sector detracted from performance, as the Fund’s holdings underperformed the general municipal market. |
| » | | Security selection within the industrial revenue sector detracted from performance, as the Fund’s holdings underperformed the general municipal market. |
| » | | Security selection within the water & sewer sector detracted from performance, as the Fund’s holdings underperformed the general municipal market. |
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| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 11 |
Financial Highlights PIMCO New York Municipal Income Fund III
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Investment Operations | | | | Less Distributions to ARPS(c) | | |
| | | | | | | | | | | | | | | |
Selected Per Share Data
for the Year or Period Ended^: | | Net Asset
Value
Beginning
of Year
or Period(a) | | Net
Investment
Income
(Loss)(b) | | Net
Realized/
Unrealized
Gain (Loss) | | | | From Net
Investment
Income | | From Net
Realized
Capital Gains | | Net Increase
(Decrease) in Net Assets
Applicable
to Common
Shareholders
Resulting
from
Operations |
| | | | | | | |
01/01/2020 - 06/30/2020+ | | | $ | 9.29 | | | | $ | 0.24 | | | | $ | (0.41 | ) | | | | | | | | $ | (0.05 | ) | | | $ | 0.00 | | | | $ | (0.22 | ) |
| | | | | | | |
12/31/2019 | | | | 8.66 | | | | | 0.55 | | | | | 0.66 | | | | | | | | | | (0.13 | ) | | | | 0.00 | | | | | 1.08 | |
| | | | | | | |
12/31/2018 | | | | 9.27 | | | | | 0.57 | | | | | (0.61 | ) | | | | | | | | | (0.13 | ) | | | | 0.00 | | | | | (0.17 | ) |
| | | | | | | |
12/31/2017 | | | | 8.95 | | | | | 0.56 | | | | | 0.36 | | | | | | | | | | (0.08 | ) | | | | 0.00 | | | | | 0.84 | |
| | | | | | | |
12/31/2016 | | | | 9.55 | | | | | 0.56 | | | | | (0.49 | ) | | | | | | | | | (0.04 | ) | | | | 0.00 | | | | | 0.03 | |
| | | | | | | |
10/01/2015 - 12/31/2015(h) | | | | 9.42 | | | | | 0.14 | | | | | 0.15 | | | | | | | | | | (0.00 | ) | | | | 0.00 | | | | | 0.29 | |
| | | | | | | |
09/30/2015 | | | | 9.43 | | | | | 0.57 | | | | | 0.06 | | | | | | | | | | (0.01 | ) | | | | 0.00 | | | | | 0.62 | |
| | | | | | |
| 12 | | PIMCO CLOSED-END FUNDS | | | | See Accompanying Notes |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Distributions to Common Shareholders(d) | | | | Common Share |
| | | | | | | | | | | | | | | |
From Net
Investment
Income | | From Net
Realized
Capital
Gains | | Tax Basis
Return of
Capital | | Total | | Increase
Resulting from
Tender of
ARPS(c) | | Net Asset
Value End of
Year or
Period(a) | | Market Price
End of Year
or Period | | Total
Investment
Return(e)(a) |
| | | | | | | |
| | $ | (0.21 | ) | | | $ | 0.00 | | | | $ | 0.00 | | | | $ | (0.21 | ) | | | $ | 0.00 | | | | $ | 8.86 | | | | $ | 9.40 | | | | | (0.04 | )% |
| | | | | | | |
| | | (0.41 | ) | | | | 0.00 | | | | | (0.04 | ) | | | | (0.45 | ) | | | | 0.00 | | | | | 9.29 | | | | | 9.63 | | | | | 16.76 | |
| | | | | | | |
| | | (0.49 | ) | | | | 0.00 | | | | | (0.02 | ) | | | | (0.51 | ) | | | | 0.07 | | | | | 8.66 | | | | | 8.65 | | | | | (7.67 | ) |
| | | | | | | |
| | | (0.52 | ) | | | | 0.00 | | | | | 0.00 | | | | | (0.52 | ) | | | | 0.00 | | | | | 9.27 | | | | | 9.92 | | | | | 4.34 | |
| | | | | | | |
| | | (0.63 | ) | | | | 0.00 | | | | | 0.00 | | | | | (0.63 | ) | | | | 0.00 | | | | | 8.95 | | | | | 10.04 | | | | | 3.95 | |
| | | | | | | |
| | | (0.16 | ) | | | | 0.00 | | | | | 0.00 | | | | | (0.16 | )(i) | | | | 0.00 | | | | | 9.55 | | | | | 10.27 | | | | | 5.75 | |
| | | | | | | |
| | | (0.63 | ) | | | | 0.00 | | | | | 0.00 | | | | | (0.63 | ) | | | | 0.00 | | | | | 9.42 | | | | | 9.87 | | | | | 11.09 | |
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 13 |
Financial Highlights PIMCO New York Municipal Income Fund III (cont.)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Ratios/Supplemental Data | |
| | | | | | Ratios to Average Net Assets Applicable to Common Shareholders | | | | | | | |
Selected Per Share Data
for the Year or Period Ended^: | |
Net Assets
Applicable
to Common
Shareholders
End of Year
or Period
(000s) | | | Expenses(f)(g) | | | Expenses
Excluding
Waivers(f)(g) | | | Expenses
Excluding
Interest
Expense(f) | | | Expenses
Excluding
Interest
Expense and
Waivers(f) | | | Net
Investment
Income
(Loss)(f) | | | ARPS
Asset
Coverage
Per Share(c) | | | Portfolio
Turnover
Rate | |
| | | | | | | | |
01/01/2020 - 06/30/2020+ | | $ | 50,740 | | | | 2.01 | %* | | | 2.01 | %* | | | 1.50 | %* | | | 1.50 | %* | | | 5.44 | %* | | $ | 68,073 | | | | 15 | % |
| | | | | | | | |
12/31/2019 | | | 53,135 | | | | 2.19 | | | | 2.19 | | | | 1.47 | | | | 1.47 | | | | 6.06 | | | | 70,100 | | | | 14 | |
| | | | | | | | |
12/31/2018 | | | 49,484 | | | | 2.18 | | | | 2.18 | | | | 1.54 | | | | 1.54 | | | | 6.45 | | | | 66,985 | | | | 24 | |
| | | | | | | | |
12/31/2017 | | | 52,884 | | | | 1.83 | | | | 1.83 | | | | 1.57 | | | | 1.57 | | | | 6.07 | | | | 66,300 | | | | 12 | |
| | | | | | | | |
12/31/2016 | | | 50,981 | | | | 1.61 | | | | 1.61 | | | | 1.50 | | | | 1.50 | | | | 5.88 | | | | 64,820 | | | | 24 | |
| | | | | | | | |
10/01/2015 - 12/31/2015(h) | | | 54,247 | | | | 1.55 | * | | | 1.55 | * | | | 1.53 | * | | | 1.53 | * | | | 5.87 | * | | | 67,378 | | | | 0 | |
| | | | | | | | |
09/30/2015 | | | 53,548 | | | | 1.55 | | | | 1.55 | | | | 1.49 | | | | 1.49 | | | | 6.04 | | | | 66,764 | | | | 13 | |
| ^ | A zero balance may reflect actual amounts rounding to less than $0.01 or 0.01%. |
| (a) | Includes adjustments required by U.S. GAAP and may differ from net asset values and performance reported elsewhere by the Fund. |
| (b) | Per share amounts based on average number of common shares outstanding during the year or period. |
| (c) | Auction Rate Preferred Shareholders (“ARPS”) asset coverage per share is disclosed as the product of the asset coverage ratio as of period end and the current liquidation preference. See Note 12, Auction Rate Preferred Shares, in the Notes to Financial Statements for more information. |
| (d) | The tax characterization of distributions is determined in accordance with Federal income tax regulations. The actual tax characterization of distributions paid is determined at the end of the fiscal year. See Note 2, Distributions — Common Shares, in the Notes to Financial Statements for more information. |
| (e) | Total investment return is calculated assuming a purchase of a common share at the market price on the first day and a sale of a common share at the market price on the last day of each year or period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions in connection with the purchase or sale of Fund shares. |
| (f) | Calculated on the basis of income and expenses applicable to both common and preferred shares relative to the average net assets of common shareholders. The expense ratio and net investment income do not reflect the effects of dividend payments to preferred shareholders. |
| (g) | Ratio includes interest expense which primarily relates to participation in borrowing and financing transactions. See Note 5, Borrowings and Other Financing Transactions, in the Notes to Financial Statements for more information. |
| (h) | Fiscal year end changed from September 30th to December 31st. |
| (i) | Total distributions for the period ended December 31, 2015 may be lower than prior fiscal years due to fiscal year end changes resulting in a reduction of the amount of days in the period ended December 31, 2015. |
| | | | | | |
| 14 | | PIMCO CLOSED-END FUNDS | | | | See Accompanying Notes |
Statement of Assets and Liabilities PIMCO New York Municipal Income Fund III
(Unaudited)
June 30, 2020
| | | | |
| (Amounts in thousands†, except per share amounts) | | | |
| |
Assets: | | | | |
| |
Investments, at value | | | | |
Investments in securities* | | $ | 91,711 | |
Interest and/or dividends receivable | | | 956 | |
Other assets | | | 7 | |
| |
Total Assets | | | 92,674 | |
| |
Liabilities: | | | | |
| |
Borrowings & Other Financing Transactions | | | | |
Payable for tender option bond floating rate certificates | | $ | 11,654 | |
Payable for investments purchased | | | 510 | |
Distributions payable to common shareholders | | | 203 | |
Accrued management fees | | | 57 | |
Other liabilities | | | 60 | |
| |
Total Liabilities | | | 12,484 | |
| |
Auction Rate Preferred Shares^ | | $ | 29,450 | |
| |
Net Assets Applicable to Common Shareholders | | $ | 50,740 | |
| |
Net Assets Applicable to Common Shareholders Consist of: | | | | |
| |
Par value^^ | | $ | 0 | |
Paid in capital in excess of par | | | 46,058 | |
Distributable earnings (accumulated loss) | | | 4,682 | |
| |
Net Assets Applicable to Common Shareholders | | | 50,740 | |
| |
Net Asset Value Per Common Share(a) | | $ | 8.86 | |
| |
Common Shares Outstanding | | | 5,725 | |
| |
Auction Rate Preferred Shares Issued and Outstanding | | | 1 | |
| |
Cost of investments in securities | | $ | 86,402 | |
| |
* Includes repurchase agreements of: | | $ | 2,892 | |
| † | A zero balance may reflect actual amounts rounding to less than one thousand. |
| ^ | ($0.00001 per share and $25,000 liquidation preference per share) |
| (a) | Includes adjustments required by U.S. GAAP and may differ from net asset values and performance reported elsewhere by the Fund. |
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 15 |
Statement of Operations PIMCO New York Municipal Income Fund III
| | | | |
| Six Months Ended June 30, 2020 (Unaudited) | | | |
| (Amounts in thousands†) | | | |
| |
Investment Income: | | | | |
| |
Interest | | $ | 1,885 | |
Total Income | | | 1,885 | |
| |
Expenses: | | | | |
| |
Management fees | | | 342 | |
Trustee fees and related expenses | | | 6 | |
Interest expense | | | 130 | |
Auction agent fees and commissions | | | 18 | |
Auction rate preferred shares related expenses | | | 13 | |
Miscellaneous expense | | | 1 | |
Total Expenses | | | 510 | |
| |
Net Investment Income (Loss) | | | 1,375 | |
| |
Net Realized Gain (Loss): | | | | |
| |
Investments in securities | | | (437 | ) |
| |
Net Realized Gain (Loss) | | | (437 | ) |
| |
Net Change in Unrealized Appreciation (Depreciation): | | | | |
| |
Investments in securities | | | (1,867 | ) |
| |
Net Change in Unrealized Appreciation (Depreciation) | | | (1,867 | ) |
| |
Net Increase (Decrease) in Net Assets Resulting from Operations | | $ | (929 | ) |
| |
Distributions on Auction Rate Preferred Shares from Net Investment Income and/or Realized Capital Gains | | $ | (276 | ) |
| |
Net Increase (Decrease) in Net Assets Applicable to Common Shareholders Resulting from Operations | | $ | (1,205 | ) |
| † | A zero balance may reflect actual amounts rounding to less than one thousand. |
| | | | | | |
| 16 | | PIMCO CLOSED-END FUNDS | | | | See Accompanying Notes |
Statements of Changes in Net Assets PIMCO New York Municipal Income Fund III
| | | | | | | | |
| (Amounts in thousands†) | | Six Months Ended
June 30, 2020
(Unaudited) | | | Year Ended
December 31, 2019 | |
| | |
Increase (Decrease) in Net Assets from: | | | | | | | | |
| | |
Operations: | | | | | | | | |
| | |
Net investment income (loss) | | $ | 1,375 | | | $ | 3,158 | |
Net realized gain (loss) | | | (437 | ) | | | 178 | |
Net change in unrealized appreciation (depreciation) | | | (1,867 | ) | | | 3,518 | |
| | |
Net Increase (Decrease) in Net Assets Resulting from Operations | | | (929 | ) | | | 6,854 | |
Distributions on auction rate preferred shares from net investment income and/or realized capital gains | | | (276 | ) | | | (741 | ) |
| | |
Net Increase (Decrease) in Net Assets Applicable to Common Shareholders Resulting from Operations | | | (1,205 | ) | | | 6,113 | |
| | |
Distributions to Common Shareholders: | | | | | | | | |
| | |
From net investment income and/or net realized capital gains | | | (1,219 | ) | | | (2,337 | ) |
Tax basis return of capital | | | 0 | | | | (214 | ) |
| | |
Total Distributions to Common Shareholders(a) | | | (1,219 | ) | | | (2,551 | ) |
| | |
Common Share Transactions*: | | | | | | | | |
| | |
Issued as reinvestment of distributions | | | 29 | | | | 89 | |
| | |
Total increase (decrease) in net assets applicable to common shareholders | | | (2,395 | ) | | | 3,651 | |
| | |
Net Assets Applicable to Common Shareholders: | | | | | | | | |
| | |
Beginning of period | | | 53,135 | | | | 49,484 | |
End of period | | $ | 50,740 | | | $ | 53,135 | |
| | |
* Common Share Transactions: | | | | | | | | |
| | |
Shares issued as reinvestment of distributions | | | 3 | | | | 10 | |
| † | A zero balance may reflect actual amounts rounding to less than one thousand. |
| (a) | The tax characterization of distributions is determined in accordance with Federal income tax regulations. The actual tax characterization of distributions paid is determined at the end of the fiscal year. See Note 2, Distributions — Common Shares, in the Notes to Financial Statements for more information. |
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 17 |
Statement of Cash Flow PIMCO New York Municipal Income Fund III
| | | | |
Six Months Ended June 30, 2020 (Unaudited) (Amounts in thousands†) | | | |
| |
Cash Flows Provided by (Used for) Operating Activities: | | | | |
| |
Net increase (decrease) in net assets resulting from operations | | $ | (929 | ) |
| |
Adjustments to Reconcile Net Increase (Decrease) in Net Assets from Operations to Net Cash Provided by (Used for) Operating Activities: | | | | |
| |
Purchases of long-term securities | | | (17,047 | ) |
Proceeds from sales of long-term securities | | | 25,644 | |
(Purchases) Proceeds from sales of short-term portfolio investments, net | | | (1,113 | ) |
(Increase) decrease in interest and/or dividends receivable | | | 171 | |
Increase (decrease) in payable for investments purchased | | | 510 | |
Increase (decrease) in accrued management fees | | | (3 | ) |
Increase (decrease) in other liabilities | | | (75 | ) |
Net Realized (Gain) Loss | | | | |
Investments in securities | | | 437 | |
Net Change in Unrealized (Appreciation) Depreciation | | | | |
Investments in securities | | | 1,867 | |
Net amortization (accretion) on investments | | | 153 | |
Net Cash Provided by (Used for) Operating Activities | | | 9,615 | |
| |
Cash Flows Received from (Used for) Financing Activities: | | | | |
| |
Cash distributions paid to comon shareholders* | | | (1,190 | ) |
Cash distributions paid to auction rate preferred shareholders | | | (280 | ) |
Proceeds from tender option bond transactions | | | 2,700 | |
Payments on tender option bond transactions | | | (10,845 | ) |
Net Cash Received from (Used for) Financing Activities | | | (9,615 | ) |
| |
Net Increase (Decrease) in Cash and Foreign Currency | | | 0 | |
| |
Cash and Foreign Currency: | | | | |
| |
Beginning of period | | | 0 | |
End of period | | $ | 0 | |
* Reinvestment of distributions to common shareholders | | $ | 29 | |
| |
Supplemental Disclosure of Cash Flow Information: | | | | |
Interest expense paid during the period | | $ | 174 | |
| † | A zero balance may reflect actual amounts rounding to less than one thousand. |
A Statement of Cash Flows is presented when the Fund has a significant amount of borrowing during the period, based on the average total borrowing outstanding in relation to total assets or when substantially all of the Fund’s investments are not classified as Level 1 or 2 in the fair value hierarchy.
| | | | | | |
| 18 | | PIMCO CLOSED-END FUNDS | | | | See Accompanying Notes |
Schedule of Investments PIMCO New York Municipal Income Fund III
(Unaudited)
June 30, 2020
(Amounts in thousands*, except number of shares, contracts and units, if any)
| | | | | | | | | | | | |
| | | | | PRINCIPAL
AMOUNT
(000S) | | | | | MARKET
VALUE
(000S) | |
| INVESTMENTS IN SECURITIES 180.7% | |
| | | | | | | | | | | | |
| MUNICIPAL BONDS & NOTES 175.0% | |
| | | | | | | | | | | | |
| ILLINOIS 4.8% | |
|
Chicago, Illinois General Obligation Bonds, Series 2015 | |
5.250% due 01/01/2028 | | $ | | | 1,900 | | | $ | | | 2,035 | |
|
Illinois State General Obligation Bonds, Series 2012 | |
5.000% due 08/01/2023 | | | | | 400 | | | | | | 423 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 2,458 | |
| | | | | | | | | | | | |
| |
| NEW YORK 167.4% | |
|
Housing Development Corp., New York Revenue Bonds, Series 2017 | |
3.700% due 11/01/2047 (c) | | | | | 500 | | | | | | 522 | |
|
Hudson Yards Infrastructure Corp., New York Revenue Bonds, Series 2011 | |
5.750% due 02/15/2047 | | | | | 4,000 | | | | | | 4,132 | |
|
Metropolitan Transportation Authority, New York Revenue Bonds, Series 2013 | |
5.000% due 11/15/2042 | | | | | 2,000 | | | | | | 2,102 | |
|
Metropolitan Transportation Authority, New York Revenue Bonds, Series 2014 | |
5.000% due 11/15/2039 | | | | | 2,000 | | | | | | 2,158 | |
|
Monroe County Industrial Development Corp., New York Revenue Bonds, (FHA Insured), Series 2010 | |
5.500% due 08/15/2040 | | | | | 1,500 | | | | | | 1,534 | |
|
Monroe County Industrial Development Corp., New York Revenue Bonds, Series 2013 | |
5.000% due 07/01/2043 | | | | | 1,750 | | | | | | 1,993 | |
|
Nassau County, New York Industrial Development Agency Revenue Bonds, Series 2014 | |
2.000% due 01/01/2049 ^(a) | | | | | 135 | | | | | | 20 | |
6.700% due 01/01/2049 | | | | | 375 | | | | | | 297 | |
|
New York City Housing Development Corp. Revenue Bonds, Series 2013 | |
5.250% due 07/01/2031 | | | | | 500 | | | | | | 561 | |
|
New York City Industrial Development Agency, New York Revenue Bonds, (AGC Insured), Series 2009 | |
6.500% due 01/01/2046 | | | | | 600 | | | | | | 603 | |
7.000% due 03/01/2049 | | | | | 2,200 | | | | | | 2,211 | |
|
New York City Transitional Finance Authority Future Tax Secured, New York Revenue Bonds, Series 2013 | |
5.000% due 11/01/2042 | | | | | 2,000 | | | | | | 2,235 | |
|
New York City Trust for Cultural Resources Revenue Bonds, Series 2014 | |
5.000% due 08/01/2043 | | | | | 2,000 | | | | | | 2,200 | |
|
New York City Water & Sewer System, New York Revenue Bonds, Series 2001 | |
0.140% due 06/15/2033 | | | | | 2,005 | | | | | | 2,005 | |
| | | | | | | | | | | | |
| | | | | PRINCIPAL
AMOUNT
(000S) | | | | | MARKET
VALUE
(000S) | |
|
New York City Water & Sewer System, New York Revenue Bonds, Series 2010 | |
0.120% due 06/15/2043 | | $ | | | 1,000 | | | $ | | | 1,000 | |
|
New York City Water & Sewer System, New York Revenue Bonds, Series 2012 | |
5.000% due 06/15/2047 | | | | | 2,500 | | | | | | 2,733 | |
|
New York City, General Obligation Bonds, Series 2013 | |
5.000% due 08/01/2031 | | | | | 2,590 | | | | | | 2,900 | |
|
New York City, New York General Obligation Bonds, Series 2018 | |
5.000% due 04/01/2045 (c) | | | | | 2,000 | | | | | | 2,406 | |
|
New York City, New York Transitional Finance Authority Building Aid Revenue Bonds, Series 2018 | |
5.250% due 07/15/2036 | | | | | 1,000 | | | | | | 1,265 | |
|
New York City, New York Trust for Cultural Resources Revenue Bonds, Series 2009 | |
0.120% due 07/01/2032 | | | | | 250 | | | | | | 250 | |
|
New York Convention Center Development Corp. Revenue Bonds, Series 2015 | |
5.000% due 11/15/2045 | | | | | 500 | | | | | | 533 | |
|
New York County, New York Tobacco Trust II Revenue Bonds, Series 2001 | |
5.750% due 06/01/2043 | | | | | 335 | | | | | | 335 | |
|
New York County, New York Tobacco Trust IV Revenue Bonds, Series 2005 | |
0.000% due 06/01/2050 (b) | | | | | 10,000 | | | | | | 1,769 | |
5.000% due 06/01/2042 | | | | | 3,200 | | | | | | 3,200 | |
|
New York County, New York Tobacco Trust V Revenue Bonds, Series 2005 | |
0.000% due 06/01/2055 (b) | | | | | 2,500 | | | | | | 126 | |
|
New York Liberty Development Corp. Revenue Bonds, Series 2007 | |
5.500% due 10/01/2037 | | | | | 2,400 | | | | | | 3,370 | |
|
New York Liberty Development Corp. Revenue Bonds, Series 2011 | |
5.750% due 11/15/2051 | | | | | 4,000 | | | | | | 4,197 | |
|
New York Liberty Development Corp. Revenue Bonds, Series 2014 | |
5.000% due 11/15/2044 | | | | | 1,750 | | | | | | 1,817 | |
|
New York Power Authority Revenue Bonds, Series 2020 | |
4.000% due 11/15/2055 | | | | | 900 | | | | | | 1,043 | |
|
New York State Dormitory Authority Revenue Bonds, Series 2003 | |
0.120% due 02/15/2031 | | | | | 705 | | | | | | 705 | |
|
New York State Dormitory Authority Revenue Bonds, Series 2010 | |
5.500% due 07/01/2040 | | | | | 500 | | | | | | 500 | |
|
New York State Dormitory Authority Revenue Bonds, Series 2011 | |
6.000% due 07/01/2040 | | | | | 250 | | | | | | 250 | |
| | | | | | |
| See Accompanying Notes | | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 19 |
Schedule of Investments PIMCO New York Municipal Income Fund III (Cont.)
| | | | | | | | | | | | |
| | | | | PRINCIPAL
AMOUNT
(000S) | | | | | MARKET
VALUE
(000S) | |
|
New York State Dormitory Authority Revenue Bonds, Series 2013 | |
5.000% due 02/15/2029 | | $ | | | 750 | | | $ | | | 842 | |
|
New York State Dormitory Authority Revenue Bonds, Series 2017 | |
4.000% due 02/15/2047 (c) | | | | | 500 | | | | | | 552 | |
5.000% due 12/01/2036 | | | | | 1,000 | | | | | | 1,153 | |
|
New York State Dormitory Authority Revenue Bonds, Series 2018 | |
5.000% due 03/15/2037 | | | | | 1,000 | | | | | | 1,241 | |
|
New York State Dormitory Authority Revenue Bonds, Series 2019 | |
5.000% due 03/15/2047 | | | | | 2,500 | | | | | | 3,094 | |
|
New York State Dormitory Authority Revenue Bonds, Series 2020 | |
4.000% due 07/01/2046 | | | | | 500 | | | | | | 549 | |
4.000% due 07/01/2053 | | | | | 1,000 | | | | | | 1,115 | |
|
New York State Urban Development Corp. Revenue Bonds, Series 2017 | |
4.000% due 03/15/2046 (c) | | | | | 3,000 | | | | | | 3,348 | |
|
New York State Urban Development Corp., Revenue Notes, Series 2019 | |
4.000% due 03/15/2048 (c) | | | | | 3,000 | | | | | | 3,388 | |
|
Niagara Tobacco Asset Securitization Corp., New York Revenue Bonds, Series 2014 | |
5.250% due 05/15/2034 | | | | | 500 | | | | | | 525 | |
5.250% due 05/15/2040 | | | | | 500 | | | | | | 522 | |
|
Onondaga County, New York Revenue Bonds, Series 2011 | |
5.000% due 12/01/2036 | | | | | 400 | | | | | | 427 | |
|
Onondaga County, New York Trust for Cultural Resources Revenue Bonds, Series 2019 | |
5.000% due 12/01/2043 | | | | | 500 | | | | | | 637 | |
|
Port Authority of New York & New Jersey Revenue Bonds, Series 2010 | |
6.000% due 12/01/2036 | | | | | 600 | | | | | | 605 | |
|
Port Authority of New York & New Jersey Revenue Bonds, Series 2016 | |
5.250% due 11/15/2056 (c) | | | | | 3,500 | | | | | | 4,143 | |
|
Port Authority of New York & New Jersey Revenue Bonds, Series 2018 | |
5.000% due 07/15/2036 | | | | | 500 | | | | | | 620 | |
|
Triborough Bridge & Tunnel Authority, New York Revenue Bonds, Series 2018 | |
5.000% due 11/15/2045 (c) | | | | | 4,000 | | | | | | 4,807 | |
|
Triborough Bridge & Tunnel Authority, New York Revenue Bonds, Series 2019 | |
5.000% due 11/15/2042 | | | | | 750 | | | | | | 926 | |
|
Troy Capital Resource Corp., New York Revenue Bonds, Series 2010 | |
5.125% due 09/01/2040 | | | | | 1,400 | | | | | | 1,411 | |
| | | | | | | | | | | | |
| | | | | PRINCIPAL
AMOUNT
(000S) | | | | | MARKET
VALUE
(000S) | |
|
Troy Capital Resource Corp., New York Revenue Bonds, Series 2020 | |
5.000% due 09/01/2034 | | $ | | | 585 | | | $ | | | 708 | |
|
TSASC, Inc., New York Revenue Bonds, Series 2017 | |
5.000% due 06/01/2041 | | | | | 2,000 | | | | | | 2,205 | |
|
Ulster County, New York Capital Resource Corp. Revenue Bonds, Series 2017 | |
5.250% due 09/15/2047 | | | | | 500 | | | | | | 443 | |
|
Westchester County Healthcare Corp., New York Revenue Bonds, Series 2010 | |
6.125% due 11/01/2037 | | | | | 600 | | | | | | 611 | |
|
Yonkers Economic Development Corp., New York Revenue Bonds, Series 2010 | |
6.000% due 10/15/2030 | | | | | 80 | | | | | | 81 | |
| | | | | | | | | | | | |
| | | | | | | | | | | 84,925 | |
| | | | | | | | | | | | |
| |
| PENNSYLVANIA 1.0% | |
|
Berks County, Pennsylvania Industrial Development Authority Revenue Bonds, Series 2017 | |
4.000% due 11/01/2050 | | | | | 500 | | | | | | 506 | |
| | | | | | | | | | | | |
| |
| PUERTO RICO 1.8% | |
|
Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue Bonds, Series 2019 | |
4.784% due 07/01/2058 | | | | | 900 | | | | | | 930 | |
| | | | | | | | | | | | |
Total Municipal Bonds & Notes
(Cost $83,510) | | | 88,819 | |
| | | | |
| |
| SHORT-TERM INSTRUMENTS 5.7% | |
| |
| REPURCHASE AGREEMENTS (d) 5.7% | |
| | | | | | | | | | | 2,892 | |
| | | | | | | | | | | | |
Total Short-Term Instruments
(Cost $2,892) | | | 2,892 | |
| |
| | | | |
Total Investments in Securities
(Cost $86,402) | | | 91,711 | |
| |
| | | | |
Total Investments 180.7%
(Cost $86,402) | | | $ | | | 91,711 | |
| | | | | | | | | | | | |
| Auction Rate Preferred Shares (58.0)% | | | | | | | | | (29,450 | ) |
| | | | | | | | | | | | |
| Other Assets and Liabilities, net (22.7)% | | | | | | | | | (11,521 | ) |
| | | | |
| Net Assets Applicable to Common Shareholders 100.0% | | | $ | | | 50,740 | |
| | | | | | | |
| | | | | | |
| 20 | | PIMCO CLOSED-END FUNDS | | | | See Accompanying Notes |
(Unaudited)
June 30, 2020
NOTES TO SCHEDULE OF INVESTMENTS:
| * | A zero balance may reflect actual amounts rounding to less than one thousand. |
| (a) | Security is not accruing income as of the date of this report. |
| (c) | Represents an underlying municipal bond transferred to a tender option bond trust established in a tender option bond transaction in which the Fund sold, or caused the sale of, the underlying municipal bond and purchased the residual interest certificate. The security serves as collateral in a financing transaction. See Note 5, Tender Option Bond Transactions, in the Notes to Financial Statements for more information. |
BORROWINGS AND OTHER FINANCING TRANSACTIONS
(d) REPURCHASE AGREEMENTS:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Counterparty | | Lending
Rate | | | Settlement
Date | | | Maturity
Date | | | Principal
Amount | | | Collateralized By | | Collateral
(Received) | | | Repurchase
Agreements,
at Value | | | Repurchase
Agreement
Proceeds
to be
Received | |
FICC | | | 0.000 | % | | | 06/30/2020 | | | | 07/01/2020 | | | $ | 2,892 | | | U.S. Treasury Notes 1.875% due 04/30/2022 | | $ | (2,950 | ) | | $ | 2,892 | | | $ | 2,892 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Repurchase Agreements | | | | | $ | (2,950 | ) | | $ | 2,892 | | | $ | 2,892 | |
| | | | | | | | | | | | | | | |
BORROWINGS AND OTHER FINANCING TRANSACTIONS SUMMARY
The following is a summary by counterparty of the market value of Borrowings and Other Financing Transactions and collateral pledged/(received) as of June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Counterparty | | Repurchase
Agreement
Proceeds to be
Received | | | Payable for
Reverse
Repurchase
Agreements | | | Payable for
Sale-Buyback
Transactions | | | Total
Borrowings and
Other Financing
Transactions | | | Collateral
Pledged/
(Received) | | | Net
Exposure(1) | |
Global/Master Repurchase Agreement | |
FICC | | $ | 2,892 | | | $ | 0 | | | $ | 0 | | | $ | 2,892 | | | $ | (2,950 | ) | | $ | (58 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Borrowings and Other Financing Transactions | | $ | 2,892 | | | $ | 0 | | | $ | 0 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from borrowings and other financing transactions can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 7, Master Netting Arrangements, in the Notes to Financial Statements for more information. |
| | | | | | |
| See Accompanying Notes | | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 21 |
Schedule of Investments PIMCO New York Municipal Income Fund III (Cont.)
(Unaudited)
June 30, 2020
FAIR VALUE MEASUREMENTS
The following is a summary of the fair valuations according to the inputs used as of June 30, 2020 in valuing the Fund’s assets and liabilities:
| | | | | | | | | | | | | | | | |
| Category and Subcategory | | Level 1 | | | Level 2 | | | Level 3 | | | Fair
Value at
06/30/2020 | |
Investments in Securities, at Value | |
Municipal Bonds & Notes | |
Illinois | | $ | 0 | | | $ | 2,458 | | | $ | 0 | | | $ | 2,458 | |
New York | | | 0 | | | | 84,925 | | | | 0 | | | | 84,925 | |
Pennsylvania | | | 0 | | | | 506 | | | | 0 | | | | 506 | |
Puerto Rico | | | 0 | | | | 930 | | | | 0 | | | | 930 | |
Short-Term Instruments | |
Repurchase Agreements | | | 0 | | | | 2,892 | | | | 0 | | | | 2,892 | |
| | | | | | | | | | | | | | | | |
Total Investments | | $ | 0 | | | $ | 91,711 | | | $ | 0 | | | $ | 91,711 | |
| | | | | | | | | | | | | | | | |
There were no significant transfers into or out of Level 3 during the period ended June 30, 2020.
| | | | | | |
| 22 | | PIMCO CLOSED-END FUNDS | | | | See Accompanying Notes |
Notes to Financial Statements
(Unaudited)
June 30, 2020
1. ORGANIZATION
PIMCO New York Municipal Income Fund III (the “Fund”) is organized as a closed-end management investment company registered under the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (the “Act”). The Fund was organized as a Massachusetts business trust on August 20, 2002. Pacific Investment Management Company LLC (“PIMCO” or the “Manager”) serves as the Fund’s investment manager.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Fund is treated as an investment company under the reporting requirements of U.S. GAAP. The functional and reporting currency for the Fund is the U.S. dollar. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
(a) Securities Transactions and Investment Income Securities transactions are recorded as of the trade date for financial reporting purposes. Securities purchased or sold on a when-issued or delayed-delivery basis may be settled beyond a standard settlement period for the security after the trade date. Realized gains (losses) from securities sold are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, which are recorded as soon as the Fund is informed of the ex-dividend date. Interest income, adjusted for the accretion of discounts and amortization of premiums, is recorded on the accrual basis from settlement date, with the exception of securities with a forward starting effective date, where interest income is recorded on the accrual basis from effective date. For convertible securities, premiums attributable to the conversion feature are not amortized. Estimated tax liabilities on certain foreign securities are recorded on an accrual basis and are reflected as components of interest income or net change in unrealized appreciation (depreciation) on investments on the Statement of Operations, as appropriate. Tax liabilities realized as a result of such security sales are reflected as a component of net realized gain (loss) on investments on the Statement of Operations. Paydown gains (losses) on mortgage-related and other asset-backed securities, if any, are recorded as components of interest income on the Statement of Operations. Income or short-term capital gain distributions received from registered investment companies, if any, are recorded as dividend income. Long-term capital gain distributions received from registered investment companies, if any, are recorded as realized gains.
Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivable when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is probable.
(b) Distributions — Common Shares Distributions from net investment income, if any, are declared and distributed to shareholders monthly. The Fund intends to distribute at least annually
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 23 |
Notes to Financial Statements (Cont.)
to its shareholders all or substantially all of its net tax-exempt interest and any investment company taxable income, and may distribute its net capital gain.
Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from U.S. GAAP. Differences between tax regulations and U.S. GAAP may cause timing differences between income and capital gain recognition. Further, the character of investment income and capital gains may be different for certain transactions under the two methods of accounting. As a result, income distributions and capital gain distributions declared during a fiscal period may differ significantly from the net investment income (loss) and realized gains (losses) reported on the Fund’s annual financial statements presented under U.S. GAAP.
If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, in accordance with its policies and accounting practices, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. For these purposes, the Fund estimates the source or sources from which a distribution is paid, to the close of the period as of which it is paid, in reference to its internal accounting records and related accounting practices. If, based on such accounting records and practices, it is estimated that a particular distribution does not include capital gains or paid-in surplus or other capital sources, a Section 19 Notice generally would not be issued. It is important to note that differences exist between the Fund’s daily internal accounting records and practices, the Fund’s financial statements presented in accordance with U.S. GAAP, and recordkeeping practices under income tax regulations. For instance, the Fund’s internal accounting records and practices may take into account, among other factors, tax-related characteristics of certain sources of distributions that differ from treatment under U.S. GAAP. Examples of such differences may include, among others, the treatment of paydowns on mortgage-backed securities purchased at a discount and periodic payments under interest rate swap contracts. Accordingly, among other consequences, it is possible that the Fund may not issue a Section 19 Notice in situations where the Fund’s financial statements prepared later and in accordance with U.S. GAAP and/or the final tax character of those distributions might later report that the sources of those distributions included capital gains and/or a return of capital. Please visit www.pimco.com for the most recent Section 19 Notice, if applicable, for additional information regarding the estimated composition of distributions. Final determination of a distribution’s tax character will be reported on Form 1099 DIV sent to shareholders for the calendar year.
Distributions classified as a tax basis return of capital at the Fund’s fiscal year end, if any, are reflected on the Statements of Changes in Net Assets and have been recorded to paid in capital on the Statement of Assets and Liabilities. In addition, other amounts have been reclassified between distributable earnings (accumulated loss) and paid in capital on the Statement of Assets and Liabilities to more appropriately conform U.S. GAAP to tax characterizations of distributions.
(c) New Accounting Pronouncements In March 2020, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”), ASU 2020-04, which provides optional guidance to ease the potential accounting burden associated with transitioning away from the London Interbank Offered Rate and other reference rates that are expected to be discontinued. The ASU is effective immediately upon release of the update on March 12, 2020 through December 31, 2022. At this time, management is evaluating implications of these changes on the financial statements.
| | | | | | |
| 24 | | PIMCO CLOSED-END FUNDS | | | | |
(Unaudited)
June 30, 2020
3. INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS
(a) Investment Valuation Policies The net asset value (“NAV”) of the Fund’s shares is determined by dividing the total value of portfolio investments and other assets attributable to the Fund, less any liabilities by the total number of shares outstanding of the Fund.
On each day that the New York Stock Exchange (“NYSE”) is open, Fund shares are ordinarily valued as of the close of regular trading (normally 4:00 p.m., Eastern time) (“NYSE Close”). Information that becomes known to the Fund or its agents after the time as of which NAV has been calculated on a particular day will not generally be used to retroactively adjust the price of a security or the NAV determined earlier that day. If regular trading on the NYSE closes earlier than scheduled, the Fund reserves the right to either (i) calculate its NAV as of the earlier closing time or (ii) calculate its NAV as of the normally scheduled close of regular trading on the NYSE for that day. The Fund generally does not calculate its NAV on days during which the NYSE is closed. However, if the NYSE is closed on a day it would normally be open for business, the Fund reserves the right to calculate its NAV as of the normally scheduled close of regular trading on the NYSE for that day or such other time that the Fund may determine.
For purposes of calculating a NAV, portfolio securities and other assets for which market quotes are readily available are valued at market value. Market value is generally determined on the basis of official closing prices or the last reported sales prices, or if no sales are reported, based on quotes obtained from established market makers or prices (including evaluated prices) supplied by the Fund’s approved pricing services, quotation reporting systems and other third-party sources (together, “Pricing Services”). The Fund will normally use pricing data for domestic equity securities received shortly after the NYSE Close and does not normally take into account trading, clearances or settlements that take place after the NYSE Close. If market value pricing is used, a foreign (non-U.S.) equity security traded on a foreign exchange or on more than one exchange is typically valued using pricing information from the exchange considered by PIMCO to be the primary exchange. A foreign (non-U.S.) equity security will be valued as of the close of trading on the foreign exchange, or the NYSE Close, if the NYSE Close occurs before the end of trading on the foreign exchange. Domestic and foreign (non-U.S.) fixed income securities, non-exchange traded derivatives, and equity options are normally valued on the basis of quotes obtained from brokers and dealers or Pricing Services using data reflecting the earlier closing of the principal markets for those securities. Prices obtained from Pricing Services may be based on, among other things, information provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain fixed income securities purchased on a delayed-delivery basis are marked to market daily until settlement at the forward settlement date. Exchange-traded options, except equity options, futures and options on futures are valued at the settlement price determined by the relevant exchange. Swap agreements are valued on the basis of bid quotes obtained from brokers and dealers or market-based prices supplied by Pricing Services. The Fund’s investments in open-end management investment companies, other than exchange-traded funds, are valued at the NAVs of such investments.
Investments for which market quotes or market based valuations are not readily available are valued at fair value as determined in good faith by the Fund’s Board of Trustees (the “Board”) or persons acting at their direction. The Board has adopted methods for valuing securities and other assets in
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 25 |
Notes to Financial Statements (Cont.)
circumstances where market quotes are not readily available, and has delegated to PIMCO the responsibility for applying the fair valuation methods. In the event that market quotes or market based valuations are not readily available, and the security or asset cannot be valued pursuant to a Board approved valuation method, the value of the security or asset will be determined in good faith by the Board. Market quotes are considered not readily available in circumstances where there is an absence of current or reliable market-based data (e.g., trade information, bid/ask information, indicative market quotations (“Broker Quotes”), Pricing Services’ prices), including where events occur after the close of the relevant market, but prior to the NYSE Close, that materially affect the values of the Fund’s securities or assets. In addition, market quotes are considered not readily available when, due to extraordinary circumstances, the exchanges or markets on which the securities trade do not open for trading for the entire day and no other market prices are available. The Board has delegated, to the Manager, the responsibility for monitoring significant events that may materially affect the values of the Fund’s securities or assets and for determining whether the value of the applicable securities or assets should be reevaluated in light of such significant events.
When the Fund uses fair valuation to determine the value of a portfolio security or other asset for purposes of calculating its NAV, such investments will not be priced on the basis of quotes from the primary market in which they are traded, but rather may be priced by another method that the Board or persons acting at their direction believe reflects fair value. Fair valuation may require subjective determinations about the value of a security. While the Fund’s policy is intended to result in a calculation of the Fund’s NAV that fairly reflects security values as of the time of pricing, the Fund cannot ensure that fair values determined by the Board or persons acting at their direction would accurately reflect the price that the Fund could obtain for a security if it were to dispose of that security as of the time of pricing (for instance, in a forced or distressed sale). The prices used by the Fund may differ from the value that would be realized if the securities were sold.
(b) Fair Value Hierarchy U.S. GAAP describes fair value as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy that prioritizes inputs to valuation methods and requires disclosure of the fair value hierarchy, separately for each major category of assets and liabilities, that segregates fair value measurements into levels (Level 1, 2, or 3). The inputs or methodology used for valuing securities are not necessarily an indication of the risks associated with investing in those securities. Levels 1, 2, and 3 of the fair value hierarchy are defined as follows:
| ∎ | | Level 1 — Quoted prices in active markets or exchanges for identical assets and liabilities. |
| ∎ | | Level 2 — Significant other observable inputs, which may include, but are not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs. |
| ∎ | | Level 3 — Significant unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available, which may include assumptions made by the Board or persons acting at their direction that are used in determining the fair value of investments. |
| | | | | | |
| 26 | | PIMCO CLOSED-END FUNDS | | | | |
(Unaudited)
June 30, 2020
In accordance with the requirements of U.S. GAAP, the amounts of transfers into and out of Level 3, if material, are disclosed in the Notes to Schedule of Investments for the Fund.
For fair valuations using significant unobservable inputs, U.S. GAAP requires a reconciliation of the beginning to ending balances for reported fair values that presents changes attributable to realized gain (loss), unrealized appreciation (depreciation), purchases and sales, accrued discounts (premiums), and transfers into and out of the Level 3 category during the period. The end of period value is used for the transfers between Levels of the Fund’s assets and liabilities. Additionally, U.S. GAAP requires quantitative information regarding the significant unobservable inputs used in the determination of fair value of assets or liabilities categorized as Level 3 in the fair value hierarchy. In accordance with the requirements of U.S. GAAP, a fair value hierarchy, and if material, a Level 3 reconciliation and details of significant unobservable inputs, have been included in the Notes to Schedule of Investments for the Fund.
(c) Valuation Techniques and the Fair Value Hierarchy
Level 1 and Level 2 trading assets and trading liabilities, at fair value The valuation methods (or “techniques”) and significant inputs used in determining the fair values of portfolio securities or other assets and liabilities categorized as Level 1 and Level 2 of the fair value hierarchy are as follows:
Fixed income securities including corporate, convertible and municipal bonds and notes, U.S. government agencies, U.S. treasury obligations, sovereign issues, bank loans, convertible preferred securities and non-U.S. bonds are normally valued on the basis of quotes obtained from brokers and dealers or Pricing Services that use broker-dealer quotations, reported trades or valuation estimates from their internal pricing models. The Pricing Services’ internal models use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar assets. Securities that use similar valuation techniques and inputs as described above are categorized as Level 2 of the fair value hierarchy.
Fixed income securities purchased on a delayed-delivery basis or as a repurchase commitment in a sale-buyback transaction are marked to market daily until settlement at the forward settlement date and are categorized as Level 2 of the fair value hierarchy.
Level 3 trading assets and trading liabilities, at fair value When a fair valuation method is applied by PIMCO that uses significant unobservable inputs, investments will be priced by a method that the Board or persons acting at their direction believe reflects fair value and are categorized as Level 3 of the fair value hierarchy.
Short-term debt instruments (such as commercial paper) having a remaining maturity of 60 days or less may be valued at amortized cost, so long as the amortized cost value of such short-term debt instruments is approximately the same as the fair value of the instrument as determined without the use of amortized cost valuation. These securities are categorized as Level 2 or Level 3 of the fair value hierarchy depending on the source of the base price.
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 27 |
Notes to Financial Statements (Cont.)
4. SECURITIES AND OTHER INVESTMENTS
Investments in Securities
The Fund may utilize the investments and strategies described below to the extent permitted by the Fund’s investment policies.
Securities Issued by U.S. Government Agencies or Government-Sponsored Enterprises are obligations of and, in certain cases, guaranteed by, the U.S. Government, its agencies or instrumentalities. Some U.S. Government securities, such as Treasury bills, notes and bonds, and securities guaranteed by the Government National Mortgage Association, are supported by the full faith and credit of the U.S. Government; others, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Department of the Treasury (the “U.S. Treasury”); and others, such as those of the Federal National Mortgage Association (“FNMA” or “Fannie Mae”), are supported by the discretionary authority of the U.S. Government to purchase the agency’s obligations. U.S. Government securities may include zero coupon securities which do not distribute interest on a current basis and tend to be subject to a greater risk than interest-paying securities of similar maturities.
Government-related guarantors (i.e., not backed by the full faith and credit of the U.S. Government) include FNMA and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). FNMA is a government-sponsored corporation. FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA, but are not backed by the full faith and credit of the U.S. Government. FHLMC issues Participation Certificates (“PCs”), which are pass-through securities, each representing an undivided interest in a pool of residential mortgages. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the U.S. Government. Instead, they are supported only by the discretionary authority of the U.S. Government to purchase the agency’s obligations.
5. BORROWINGS AND OTHER FINANCING TRANSACTIONS
The Fund may enter into the borrowings and other financing transactions described below to the extent permitted by the Fund’s investment policies.
The following disclosures contain information on the Fund’s ability to lend or borrow cash or securities to the extent permitted under the Act, which may be viewed as borrowing or financing transactions by the Fund. The location of these instruments in the Fund’s financial statements is described below.
(a) Repurchase Agreements Under the terms of a typical repurchase agreement, the Fund purchases an underlying debt obligation (collateral) subject to an obligation of the seller to repurchase, and the Fund to resell, the obligation at an agreed-upon price and time. In an open maturity repurchase agreement, there is no pre-determined repurchase date and the agreement can be terminated by the Fund or counterparty at any time. The underlying securities for all repurchase agreements are held by the Fund’s custodian or designated subcustodians under tri-party repurchase
| | | | | | |
| 28 | | PIMCO CLOSED-END FUNDS | | | | |
(Unaudited)
June 30, 2020
agreements and in certain instances will remain in custody with the counterparty. The market value of the collateral must be equal to or exceed the total amount of the repurchase obligations, including interest. Repurchase agreements, if any, including accrued interest, are included on the Statement of Assets and Liabilities. Interest earned is recorded as a component of interest income on the Statement of Operations. In periods of increased demand for collateral, the Fund may pay a fee for the receipt of collateral, which may result in interest expense to the Fund.
(b) Tender Option Bond Transactions In a tender option bond transaction (“TOB”), a tender option bond trust (“TOB Trust”) issues floating rate certificates (“TOB Floater”) and residual interest certificates (“TOB Residual”) and utilizes the proceeds of such issuances to purchase a fixed rate municipal bond (“Fixed Rate Bond”) that is either owned or identified by the Fund. The TOB Floater is generally issued to third party investors (typically a money market fund) and the TOB Residual is generally issued to the Fund that sold or identified the Fixed Rate Bond. The TOB Trust divides the income stream provided by the Fixed Rate Bond to create two securities, the TOB Floater, which is a short-term security, and the TOB Residual, which is a longer-term security. The interest rates payable on the TOB Residual issued to the Fund bear an inverse relationship to the interest rate on the TOB Floater. The interest rate on the TOB Floater is reset by a remarketing process typically every 7 to 35 days. After income is paid on the TOB Floater at current rates, the residual income from the Fixed Rate Bond goes to the TOB Residual. Therefore, rising short-term rates result in lower income for the TOB Residual, and vice versa. In the case of a TOB Trust that utilizes the cash received (less transaction expenses) from the issuance of the TOB Floater and TOB Residual to purchase the Fixed Rate Bond from the Fund, the Fund may then invest the cash received in additional securities, generating leverage for the Fund. Other PIMCO-managed accounts may also contribute municipal bonds to a TOB Trust into which the Fund has contributed Fixed Rate Bonds. If multiple PIMCO-managed accounts participate in the same TOB Trust, the economic rights and obligations under the TOB Residual will be shared among the funds ratably in proportion to their participation in the TOB Trust.
The TOB Residual may be more volatile and less liquid than other municipal bonds of comparable maturity. In most circumstances the TOB Residual holder bears substantially all of the underlying Fixed Rate Bond’s downside investment risk and also benefits from any appreciation in the value of the underlying Fixed Rate Bond. Investments in a TOB Residual typically will involve greater risk than investments in Fixed Rate Bonds.
A TOB Residual held by the Fund provides the Fund with the right to: (i) cause the holders of the TOB Floater to tender their notes at par, and (ii) cause the sale of the Fixed Rate Bond held by the TOB Trust, thereby collapsing the TOB Trust. TOB Trusts are generally supported by a liquidity facility provided by a third party bank or other financial institution (the “Liquidity Provider”) that provides for the purchase of TOB Floaters that cannot be remarketed. The holders of the TOB Floaters have the right to tender their certificates in exchange for payment of par plus accrued interest on a periodic basis (typically weekly) or on the occurrence of certain mandatory tender events. The tendered TOB Floaters are remarketed by a remarketing agent, which is typically an affiliated entity of the Liquidity Provider. If the TOB Floaters cannot be remarketed, the TOB Floaters are purchased by the TOB Trust either from the proceeds of a loan from the Liquidity Provider or from a liquidation of the Fixed Rate Bond.
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 29 |
Notes to Financial Statements (Cont.)
The TOB Trust may also be collapsed without the consent of the Fund, as the TOB Residual holder, upon the occurrence of certain “tender option termination events” (or “TOTEs”) as defined in the TOB Trust agreements. Such termination events typically include the bankruptcy or default of the Fixed Rate Bond, a substantial downgrade in credit quality of the Fixed Rate Bond, or a judgment or ruling that interest on the Fixed Rate Bond is subject to Federal income taxation. Upon the occurrence of a termination event, the TOB Trust would generally be liquidated in full with the proceeds typically applied first to any accrued fees owed to the trustee, remarketing agent and liquidity provider, and then to the holders of the TOB Floater up to par plus accrued interest owed on the TOB Floater and a portion of gain share, if any, with the balance paid out to the TOB Residual holder. In the case of a mandatory termination event, after the payment of fees, the TOB Floater holders would be paid before the TOB Residual holders (i.e., the Fund). In contrast, in the case of a TOTE, after payment of fees, the TOB Floater holders and the TOB Residual holders would be paid pro rata in proportion to the respective face values of their certificates.
The Fund’s transfer of Fixed Rate Bonds to a TOB Trust is considered a secured borrowing for financial reporting purposes. The cash received by the TOB Trust from the sale of the TOB Floaters, less certain transaction expenses, is paid to the Fund. The Fund typically invests the cash received in additional municipal bonds. The Fund accounts for the transactions described above as secured borrowings by including the Fixed Rate Bonds in their Schedule of Investments, and account for the TOB Floater as a liability under the caption “Payable for tender option bond floating rate certificates” in the Fund’s Statement of Assets and Liabilities. Interest income, including amortization and accretion of premiums and discounts, from the underlying municipal bonds is recorded by the Fund on an accrual basis and is shown as interest on the Statement of Operations. Interest expense incurred on the secured borrowing is shown as interest expense on the Statement of Operations.
The Fund may also purchase TOB Residuals in a secondary market transaction without transferring a fixed rate municipal bond into a TOB Trust. Such transactions are not accounted for as secured borrowings but rather as a security purchase with the TOB Residual being included in the Schedule of Investments.
In December 2013, regulators finalized rules implementing Section 619 (the “Volcker Rule”) and Section 941 (the “Risk Retention Rules”) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Both the Volcker Rule and the Risk Retention Rules apply to tender option bond programs. The Volcker Rule precludes banking entities from (i) sponsoring or acquiring interests in the trusts used to hold a municipal bond in the creation of TOB Trusts; and (ii) continuing to service or maintain relationships with existing programs involving TOB Trusts to the same extent and in the same capacity as existing programs. The Risk Retention Rules require the sponsor to a TOB Trust (e.g., the Fund) to retain at least five percent of the credit risk of the underlying assets supporting to the TOB Trust’s municipal bonds. The Risk Retention Rules may adversely affect the Fund’s ability to engage in tender option bond trust transactions or increase the costs of such transactions in certain circumstances.
In response to these rules, industry participants explored various structuring alternatives for TOB Trusts established after December 31, 2013 and TOB Trusts established prior to December 31, 2013 (“Legacy TOB Trusts”) and agreed on a new tender option bond structure in which the Fund hires service providers to assist with establishing, structuring and sponsoring a TOB Trust. Service
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providers to a TOB Trust, such as administrators, liquidity providers, trustees and remarketing agents act at the direction of, and as agent of, the Fund as the TOB Residual holders.
The Fund has restructured its Legacy TOB Trusts in conformity with regulatory guidelines. Under the new TOB Trust structure, the Liquidity Provider or remarketing agent will no longer purchase the tendered TOB Floaters, even in the event of failed remarketing. This may increase the likelihood that a TOB Trust will need to be collapsed and liquidated in order to purchase the tendered TOB Floaters. The TOB Trust may draw upon a loan from the Liquidity Provider to purchase the tendered TOB Floaters. Any loans made by the Liquidity Provider will be secured by the purchased TOB Floaters held by the TOB Trust and will be subject to an interest rate agreed upon with the liquidity provider.
For the period ended June 30, 2020, the Fund’s average leverage outstanding from the use of TOB transactions and the daily weighted average interest rate, including fees, is as follows:
| | | | | | |
Average
Leverage
Outstanding
(000s) | | | Weighted
Average
Interest
Rate* | |
| |
| $ | 15,476 | | | | 1.66 | % |
6. PRINCIPAL AND OTHER RISKS
(a) Principal Risks
The principal risks associated with investment in the Fund are listed below.
Call Risk is the risk that an issuer may exercise its right to redeem a fixed income security earlier than expected (a call). Issuers may call outstanding securities prior to their maturity for a number of reasons (e.g., declining interest rates, changes in credit spreads and improvements in the issuer’s credit quality). If an issuer calls a security in which the Fund has invested, the Fund may not recoup the full amount of its initial investment and may be forced to reinvest in lower-yielding securities, securities with greater credit risks or securities with other, less favorable features.
Credit Risk is the risk that the Fund could lose money if the issuer or guarantor of a fixed-income security, or the counterparty to a derivatives contract, repurchase agreement or a loan of portfolio securities, is unable or unwilling, or is perceived (whether by market participants, rating agencies, pricing services or otherwise) as unable or unwilling, to meet its financial obligations.
Counterparty Risk is the risk that the Fund will be subject to credit risk with respect to the counterparties to the derivative contracts and other instruments entered into by the Fund or held by special purpose or structured vehicles in which the Fund invests. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery (including recovery of any collateral it has provided to the counterparty) in a dissolution, assignment for the benefit of creditors, liquidation, winding-up, bankruptcy, or other analogous proceeding.
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Notes to Financial Statements (Cont.)
Derivatives Risk is the risk of investing in derivative instruments (such as futures, swaps and structured securities), including leverage, liquidity, interest rate, market, credit and management risks, mispricing or valuation complexity. Changes in the value of the derivative may not correlate perfectly with, and may be more sensitive to market events than, the underlying asset, rate or index, and the Fund could lose more than the initial amount invested. The Fund’s use of derivatives may result in losses to the Fund, a reduction in the Fund’s returns and/or increased volatility. Over-the-counter (“OTC”) derivatives are also subject to the risk that a counterparty to the transaction will not fulfill its contractual obligations to the other party, as many of the protections afforded to centrally-cleared derivative transactions might not be available for OTC derivatives. For derivatives traded on an exchange or through a central counterparty, credit risk resides with the Fund’s clearing broker, or the clearinghouse itself, rather than with a counterparty in an OTC derivative transaction.
Changes in regulation relating to a mutual fund’s use of derivatives and related instruments could potentially limit or impact the Fund’s ability to invest in derivatives, limit the Fund’s ability to employ certain strategies that use derivatives and/or adversely affect the value of derivatives and the Fund’s performance.
High Yield Securities Risk is the risk that high yield securities and unrated securities of similar credit quality (commonly known as “junk bonds”) are subject to greater levels of credit, call and liquidity risks. High yield securities are considered primarily speculative with respect to the issuer’s continuing ability to make principal and interest payments, and may be more volatile than higher-rated securities of similar maturity.
Inflation/Deflation Risk is the risk that the value of assets or income from the Fund’s investments will be worth less in the future as inflation decreases the value of payments at future dates. As inflation increases, the real value of the Fund’s portfolio could decline. Deflation Risk is the risk that prices throughout the economy decline over time. Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Fund’s portfolio and common shares.
Interest Rate Risk is the risk that fixed income securities and other instruments in the Fund’s portfolio will decline in value because of an increase in interest rates; a fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a fund with a short average portfolio duration.
Issuer Risk is the risk that the value of a security may decline for a reason directly related to the issuer, such as management performance, financial leverage and reduced demand for the issuer’s goods or services.
Leveraging Risk is the risk that certain transactions of the Fund, such as reverse repurchase agreements, dollar rolls and/or borrowings (as well as from any future issuance of preferred shares), delayed delivery or forward commitment transactions, or derivative instruments, may give rise to leverage, magnifying gains and losses and causing the Fund to be more volatile than if it had not been leveraged. This means that leverage entails a heightened risk of loss.
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Liquidity Risk is the risk that a particular investment may be difficult to purchase or sell that the Fund may be unable to sell illiquid investments at an advantageous time or price or possibly require the Fund to dispose of other investments at unfavorable times or prices in order to satisfy its obligations, which could prevent the Fund from taking advantage of other investment opportunities. Additionally, the market for certain investments may become illiquid under adverse market or economic conditions independent of any specific adverse changes in the conditions of a particular issuer.
Market Risk is the risk that the market price of securities owned by the Fund may go up or down, sometimes rapidly or unpredictably due to factors affecting securities markets generally or particular industries.
Management Risk is the risk that the investment techniques and risk analyses applied by the Manager will not produce the desired results and that legislative, regulatory, or tax restrictions, policies or developments may affect the investment techniques available to the Manager and the individual portfolio manager in connection with managing the Fund. There is no guarantee that the investment objective of the Fund will be achieved.
Municipal Bond Risk is the risk that the Fund may be affected significantly by the economic, regulatory or political developments affecting the ability of issuers of debt securities whose interest is, in the opinion of bond counsel for the issuer at the time of issuance, exempt from federal income tax to pay interest or repay principal.
Municipal Project-Specific Risk is the risk that the Fund may be more sensitive to adverse economic, business or political developments if it invests a substantial portion of its assets in the bonds of specific projects (such as those relating to education, health care, housing, transportation, and utilities), industrial development bonds, or in bonds from issuers in a single state.
New York State-Specific Risk is the risk that by concentrating its investments in New York Municipal Bonds, the Fund maybe affected significantly by economic, regulatory or political developments affecting the ability of New York issuers to pay interest or repay principal.
Non-Diversification Risk is the risk of focusing investments in a small number of issuers, including being more susceptible to risks associated with a single economic, political or regulatory occurrence than a more diversified portfolio might be. Funds that are “non-diversified” may invest a greater percentage of their assets in the securities of a single issuer (such as bonds issued by a particular state) than funds that are “diversified.”
Portfolio Turnover Risk is the risk that a high portfolio turnover will result in greater expenses to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales may result in realization of taxable capital gains (including short-term capital gains, which are generally taxed to shareholders at ordinary income tax rates when distributed net of short-term capital losses and net long-term capital losses), and may adversely affect the Fund’s after-tax returns.
Private Placements Risk is the risk that securities received in a private placement may be subject to strict restrictions on resale, and there may be no liquid secondary market or ready purchaser for such securities. Therefore, the Fund may be unable to dispose of such securities when it desires to do so, or at the most favorable time or price. Private placements may also raise valuation risks.
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Notes to Financial Statements (Cont.)
Reinvestment Risk is the risk that income from the Fund’s portfolio will decline if and when the Fund invests the proceeds from matured, traded or called debt obligations at market interest rates that are below the portfolio’s current earnings rate. The Fund also may choose to sell higher yielding portfolio securities and to purchase lower yielding securities to achieve greater portfolio diversification, because the portfolio managers believe the current holdings are overvalued or for other investment-related reasons.
Segregation and Coverage Risk is the risk that certain portfolio management techniques may be considered senior securities unless steps are taken to segregate the Fund’s assets or otherwise cover its obligations. To avoid having these instruments considered senior securities, the Fund may segregate liquid assets with a value equal (on a daily mark-to-market basis) to its obligations under these types of leveraged transactions, enter into offsetting transactions or otherwise cover such transactions. The Fund may be unable to use such segregated assets for certain other purposes, which could result in the Fund earning a lower return on its portfolio than it might otherwise earn if it did not have to segregate those assets in respect of, or otherwise cover, such portfolio positions. To the extent the Fund’s assets are segregated or committed as cover, it could limit the Fund’s investment flexibility.
Short Exposure Risk is the risk of entering into short sales, including the potential loss of more money than the actual cost of the investment, and the risk that the third party to the short sale will not fulfill its contractual obligations, causing a loss to the Fund.
Structured Investments Risk is the risk that the Fund’s investment in structured products, including, structured notes, credit-linked notes and other types of structured products bear the risks of the underlying investments, index or reference obligation and are subject to counterparty risk. The Fund may have the right to receive payments only from the structured product, and generally does not have direct rights against the issuer or the entity that sold the assets to be securitized. Structured products generally entail risks associated with derivative instruments.
Tax Risk is the risk that if, in any year, the Fund were to fail to qualify for treatment as a regulated investment company under the Tax Code, and were ineligible to or did not otherwise cure such failure, the Fund would be subject to tax on its taxable income at corporate rates and, when such income is distributed, shareholders would be subject to a further tax to the extent of the Fund’s current or accumulated earnings and profits.
Valuation Risk is the risk that fair value pricing used when market quotations are not readily available may not result in adjustments to the prices of securities or other assets, or that fair value pricing may not reflect actual market value. It is possible that the fair value determined in good faith for a security or other asset will be materially different from quoted or published prices, from the prices used by others for the same security or other asset and/or from the value that actually could be or is realized upon the sale of that security or other asset.
(b) Other Risks
In general, the Fund may be subject to additional risks, including, but not limited to, risks related to government regulation and intervention in financial markets, operational risks, risks associated with financial, economic and global market disruptions, and cybersecurity risks. Please see the Important
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Information section of this report for additional discussion of certain regulatory and market developments (such as the anticipated discontinuation of the London Interbank Offered Rate) that may impact the Fund’s performance.
Market Disruption Risk The Fund is subject to investment and operational risks associated with financial, economic and other global market developments and disruptions, including those arising from war, terrorism, market manipulation, government interventions, defaults and shutdowns, political changes or diplomatic developments, public health emergencies (such as the spread of infectious diseases, pandemics and epidemics) and natural/environmental disasters, which can all negatively impact the securities markets and cause the Fund to lose value. These events can also impair the technology and other operational systems upon which the Fund’s service providers, including PIMCO as the Fund’s investment adviser, rely, and could otherwise disrupt the Fund’s service providers’ ability to fulfill their obligations to the Fund. For example, the recent spread of an infectious respiratory illness caused by a novel strain of coronavirus (known as COVID-19) has caused volatility, severe market dislocations and liquidity constraints in many markets, including markets for the securities the Fund holds, and may adversely affect the Fund’s investments and operations. Please see the Important Information section for additional discussion of the COVID-19 pandemic.
Government Intervention in Financial Markets Federal, state, and other governments, their regulatory agencies, or self-regulatory organizations may take actions that affect the regulation of the instruments in which the Fund invests, or the issuers of such instruments, in ways that are unforeseeable. Legislation or regulation may also change the way in which the Fund itself is regulated. Such legislation or regulation could limit or preclude the Fund’s ability to achieve its investment objective. Furthermore, volatile financial markets can expose the Fund to greater market and liquidity risk and potential difficulty in valuing portfolio instruments held by the Fund. The value of the Fund’s holdings is also generally subject to the risk of future local, national, or global economic disturbances based on unknown weaknesses in the markets in which the Fund invests. In addition, it is not certain that the U.S. Government will intervene in response to a future market disturbance and the effect of any such future intervention cannot be predicted. It is difficult for issuers to prepare for the impact of future financial downturns, although companies can seek to identify and manage future uncertainties through risk management programs.
Regulatory Risk Financial entities, such as investment companies and investment advisers, are generally subject to extensive government regulation and intervention. Government regulation and/or intervention may change the way the Fund is regulated, affect the expenses incurred directly by the Fund and the value of its investments, and limit and/or preclude the Fund’s ability to achieve its investment objective. Government regulation may change frequently and may have significant adverse consequences. Moreover, government regulation may have unpredictable and unintended effects.
Operational Risk An investment in the Fund, like any fund, can involve operational risks arising from factors such as processing errors, human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel and errors caused by third-party service providers. The occurrence of any of these failures, errors or breaches could result in a loss of information, regulatory scrutiny, reputational damage or other events, any of which could have a material adverse effect on the Fund. While the Fund seeks to minimize such events through controls and oversight, there may still be failures that could cause losses to the Fund.
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Notes to Financial Statements (Cont.)
Cyber Security Risk As the use of technology has become more prevalent in the course of business, the Fund has become potentially more susceptible to operational and information security risks resulting from breaches in cyber security. A breach in cyber security refers to both intentional and unintentional cyber events that may, among other things, cause the Fund to lose proprietary information, suffer data corruption and/or destruction or lose operational capacity, result in the unauthorized release or other misuse of confidential information, or otherwise disrupt normal business operations. Cyber security failures or breaches may result in financial losses to the Fund and its shareholders. These failures or breaches may also result in disruptions to business operations, potentially resulting in financial losses; interference with the Fund’s ability to calculate its net asset value, process shareholder transactions or otherwise transact business with shareholders; impediments to trading; violations of applicable privacy and other laws; regulatory fines; penalties; reputational damage; reimbursement or other compensation costs; additional compliance and cyber security risk management costs and other adverse consequences. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future.
7. MASTER NETTING ARRANGEMENTS
The Fund may be subject to various netting arrangements (“Master Agreements”) with select counterparties. Master Agreements govern the terms of certain transactions, and are intended to reduce the counterparty risk associated with relevant transactions by specifying credit protection mechanisms and providing standardization that is intended to improve legal certainty. Each type of Master Agreement governs certain types of transactions. Different types of transactions may be traded out of different legal entities or affiliates of a particular organization, resulting in the need for multiple agreements with a single counterparty. As the Master Agreements are specific to unique operations of different asset types, they allow the Fund to close out and net its total exposure to a counterparty in the event of a default with respect to all the transactions governed under a single Master Agreement with a counterparty. For financial reporting purposes the Statement of Assets and Liabilities generally present derivative assets and liabilities on a gross basis, which reflects the full risks and exposures prior to netting.
Master Agreements can also help limit counterparty risk by specifying collateral posting arrangements at pre-arranged exposure levels. Under most Master Agreements, collateral is routinely transferred if the total net exposure to certain transactions (net of existing collateral already in place) governed under the relevant Master Agreement with a counterparty in a given account exceeds a specified threshold, which typically ranges from zero to $250,000 depending on the counterparty and the type of Master Agreement. United States Treasury Bills and U.S. dollar cash are generally the preferred forms of collateral, although other securities may be used depending on the terms outlined in the applicable Master Agreement. Securities and cash pledged as collateral are reflected as assets on the Statement of Assets and Liabilities as either a component of Investments at value (securities) or Deposits with counterparty. Cash collateral received is not typically held in a segregated account and as such is reflected as a liability on the Statement of Assets and Liabilities as Deposits from counterparty. The market value of any securities received as collateral is not reflected as a component of NAV. The Fund’s overall exposure to counterparty risk can change substantially within a short period, as it is affected by each transaction subject to the relevant Master Agreement.
Master Repurchase Agreements and Global Master Repurchase Agreements (individually and collectively “Master Repo Agreements”) govern repurchase, reverse repurchase, and certain
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sale-buyback transactions between the Fund and select counterparties. Master Repo Agreements maintain provisions for, among other things, initiation, income payments, events of default, and maintenance of collateral. The market value of transactions under the Master Repo Agreement, collateral pledged or received, and the net exposure by counterparty as of period end are disclosed in the Notes to Schedule of Investments.
8. FEES AND EXPENSES
(a) Management Fee Pursuant to the Investment Management Agreement with PIMCO (the “Agreement”), and subject to the supervision of the Board, PIMCO is responsible for providing the Fund investment guidance and policy direction in connection with the management of the Fund, including oral and written research, analysis, advice, and statistical and economic data and information. In addition, pursuant to the Agreement and subject to the general supervision of the Board, PIMCO, at its expense, provides or causes to be furnished most other supervisory and administrative services the Fund requires, including but not limited to, expenses of most third-party service providers (e.g., audit, custodial, legal, transfer agency, printing) and other expenses, such as those associated with insurance, proxy solicitations and mailings for shareholder meetings, NYSE listing and related fees, tax services, valuation services and other services the Fund requires for its daily operations.
Pursuant to the Agreement, PIMCO receives an annual fee, payable monthly, at the annual rate of 0.86%. The management fee is calculated based on the Fund’s average daily NAV (including daily net assets attributable to any preferred shares of the Fund that may be outstanding).
(b) Fund Expenses The Fund bears other expenses, which may vary and affect the total level of expenses paid by shareholders, such as (i) salaries and other compensation or expenses, including travel expenses of any of the Fund’s executive officers and employees, if any, who are not officers, directors, shareholders, members, partners or employees of PIMCO or its subsidiaries or affiliates; (ii) taxes and governmental fees, if any, levied against the Fund; (iii) brokerage fees and commissions and other portfolio transaction expenses incurred by or for the Fund (including, without limitation, fees and expenses of outside legal counsel or third-party consultants retained in connection with reviewing, negotiating and structuring specialized loans and other investments made by the Fund, subject to specific or general authorization by the Fund’s Board (for example, so-called “broken-deal costs” (e.g., fees, costs, expenses and liabilities, including, for example, due diligence-related fees, costs, expenses and liabilities, with respect to unconsummated investments))); (iv) expenses of the Fund’s securities lending (if any), including any securities lending agent fees, as governed by a separate securities lending agreement; (v) costs, including interest expenses, of borrowing money or engaging in other types of leverage financing, including, without limitation, through the use by the Fund of reverse repurchase agreements, tender option bonds, bank borrowings and credit facilities; (vi) costs, including dividend and/or interest expenses and other costs (including, without limitation, offering and related legal costs, fees to brokers, fees to auction agents, fees to transfer agents, fees to ratings agencies and fees to auditors associated with satisfying ratings agency requirements for preferred shares or other securities issued by the Fund and other related requirements in the Fund’s organizational documents) associated with the Fund’s issuance, offering, redemption and maintenance of preferred shares, commercial paper or other senior securities for the purpose of incurring leverage; (vii) fees and expenses of any underlying funds or other pooled vehicles in which
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Notes to Financial Statements (Cont.)
the Fund invests; (viii) dividend and interest expenses on short positions taken by the Fund; (ix) fees and expenses, including travel expenses, and fees and expenses of legal counsel retained for their benefit, of Trustees who are not officers, employees, partners, shareholders or members of PIMCO or its subsidiaries or affiliates; (x) extraordinary expenses, including extraordinary legal expenses, that may arise, including expenses incurred in connection with litigation, proceedings, other claims, and the legal obligations of the Fund to indemnify its Trustees, officers, employees, shareholders, distributors, and agents with respect thereto; (xi) organizational and offering expenses of the Fund, including with respect to share offerings, such as rights offerings and shelf offerings, following the Fund’s initial offering, and expenses associated with tender offers and other share repurchases and redemptions; and (xii) expenses of the Fund which are capitalized in accordance with U.S. GAAP.
Each of the Trustees of the Fund who is not an interested person under Section 2(a)(19) of the Act, (the “Independent Trustees”), also serves as a trustee of a number of other closed-end funds for which PIMCO serves as investment manager (together with the Fund, the “PIMCO Closed-End Funds”), as well as PIMCO Flexible Credit Income Fund and PIMCO Flexible Municipal Income Fund, each a closed end management investment company managed by PIMCO that is operated as an “interval fund” (the ”PIMCO Interval Funds”), and PIMCO Managed Accounts Trust, an open-end management investment company with multiple series for which PIMCO serves as investment adviser and administrator (“PMAT” and, together with the PIMCO Closed-End Funds and the PIMCO Interval Funds, the “PIMCO Managed Funds”). In addition, each of the Independent Trustees (other than Mr. Kittredge) also serves as a trustee of certain investment companies (together, the “Allianz-Managed Funds”), for which Allianz Global Investors U.S. LLC (“AllianzGI U.S.”), an affiliate of PIMCO, serves as investment manager.
The Fund pays no compensation directly to any Trustee or any other officer who is affiliated with the Manager, all of whom receive remuneration for their services to the Fund from the Manager or its affiliates.
9. RELATED PARTY TRANSACTIONS
The Manager is a related party. Fees payable to this party are disclosed in Note 8, Fees and Expenses, and the accrued related party fee amounts are disclosed on the Statement of Assets and Liabilities.
10. GUARANTEES AND INDEMNIFICATIONS
Under the Fund’s organizational documents, each Trustee and officer is indemnified, to the extent permitted by the Act, against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts.
11. PURCHASES AND SALES OF SECURITIES
The length of time the Fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by the Fund is known as “portfolio turnover.” The Fund may engage in frequent and active trading of portfolio securities to achieve its investment
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objective, particularly during periods of volatile market movements. High portfolio turnover may involve correspondingly greater transaction costs, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities, which are borne by the Fund. Such sales may also result in realization of taxable capital gains, including short-term capital gains (which are generally taxed at ordinary income tax rates when distributed to shareholders). The transaction costs associated with portfolio turnover may adversely affect the Fund’s performance. The portfolio turnover rates are reported in the Financial Highlights.
Purchases and sales of securities (excluding short-term investments) for the period ended June 30, 2020, were as follows (amounts in thousands†):
| | | | | | | | | | | | | | |
| U.S. Government/Agency | | | All Other | |
| | | |
| Purchases | | | Sales | | | Purchases | | | Sales | |
| | | |
| $ | 0 | | | $ | 0 | | | $ | 14,233 | | | $ | 14,207 | |
| | | | | | | | | | | | | | |
| † | A zero balance may reflect actual amounts rounding to less than one thousand. |
12. AUCTION-RATE PREFERRED SHARES
The series A of Auction-Rate Preferred Shares (“ARPS”) outstanding of the Fund has a liquidation preference of $25,000 per share plus any accumulated, unpaid dividends. Dividends are accumulated daily at an annual rate that is typically reset every seven days through auction procedures (or through default procedures in the event of failed auctions). Distributions of net realized capital gains, if any, are paid at least annually.
For the period ended June 30, 2020, the annualized dividend rates on the ARPS ranged from:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Shares
Issued and
Outstanding | | | High | | | Low | | | As of
June 30, 2020 | |
| | | | | |
| Series A | | | | | | | 1,178 | | | | 8.595% | | | | 0.220% | | | | 0.252% | |
The Fund is subject to certain limitations and restrictions while ARPS are outstanding. Failure to comply with these limitations and restrictions could preclude the Fund from declaring or paying any dividends or distributions to common shareholders or repurchasing common shares and/or could trigger the mandatory redemption of ARPS at their liquidation preference plus any accumulated, unpaid dividends.
Preferred shareholders of the Fund, who are entitled to one vote per share, generally vote together with the common shareholders of the Fund but vote separately as a class to elect two Trustees of the Fund and on certain matters adversely affecting the rights of the ARPS.
Since mid-February 2008, holders of ARPS issued by the Fund have been directly impacted by a lack of liquidity, which has similarly affected ARPS holders in many of the nation’s closed-end funds. Since then, regularly scheduled auctions for ARPS issued by the Fund has consistently “failed” because of insufficient demand (bids to buy shares) to meet the supply (shares offered for sale) at each auction. In a failed auction, ARPS holders cannot sell all, and may not be able to sell any, of their shares tendered for sale. While repeated auction failures have affected the liquidity for ARPS,
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Notes to Financial Statements (Cont.)
they do not constitute a default or automatically alter the credit quality of the ARPS, and ARPS holders have continued to receive dividends at the defined “maximum rate,” as defined for the Fund in the table below.
| | | | | | | | | | |
| Applicable % | | | | Reference Rate | | | | | Maximum Rate |
| | | | The higher of 30-day “AA” Composite Commercial Paper Rates | | | | | | |
| 110%1 | | x | | OR | | | = | | | Maximum Rate for the Fund |
| | | | | The Taxable Equivalent of the Short-Term Municipal Obligation Rate2 | | | | | | |
| 1 | 150% if all or part of the dividend consists of taxable income or capital gain. |
| 2 | “Taxable Equivalent of the Short-Term Municipal Obligations Rate” means 90% of the quotient of (A) the per annum rate expressed on an interest equivalent basis equal to the S&P Municipal Bond 7-day High Grade Rate Index divided by (B) 1.00 minus the Marginal Tax Rate (defined as the maximum marginal regular Federal individual income tax rate applicable to an individual’s or a corporation’s ordinary income, whichever is greater). |
The maximum rate is a function of short-term interest rates and is typically higher than the rate that would have otherwise been set through a successful auction. If the Fund’s ARPS auctions continue to fail and the “maximum rate” payable on the ARPS rises as a result of changes in short-term interest rates, returns for the Fund’s common shareholders could be adversely affected.
On July 20, 2018, the Fund commenced a voluntary tender offer for up to 100% of its outstanding ARPS at a price equal to 85% of the ARPS’ per share liquidation preference of $25,000 (or $21,250 per share) and any unpaid dividends accrued through the expiration of the tender offer (the “Tender Offer”).
On September 12, 2018, the Fund announced the expiration and results of its Tender Offer. Details of the ARPS tendered and not withdrawn for the Fund for the reporting period ended December 31, 2018 are provided in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Liquidation
Preference
Per Share | | | Tender
Offer Price
Per Share | | | Price
Percentage | | | Cash
Exchanged
for ARPS
Tendered | | | ARPS
Outstanding
as of
06/30/2018 | | | ARPS
Tendered | | | ARPS
Outstanding
After
Tender
Offer as of
12/31/2018 | |
| | | | | | |
| $ | 25,000 | | | $ | 21,250 | | | | 85% | | | $ | 2,167,500 | | | | 1,280 | | | | 102 | | | | 1,178 | |
13. REGULATORY AND LITIGATION MATTERS
The Fund is not named as a defendant in any material litigation or arbitration proceedings and is not aware of any material litigation or claim pending or threatened against it.
The foregoing speaks only as of the date of this report.
14. FEDERAL INCOME TAX MATTERS
The Fund intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code (the “Code”) and distribute all of its taxable income and net realized gains, if applicable, to shareholders. Accordingly, no provision for Federal income taxes has been made.
| | | | | | |
| 40 | | PIMCO CLOSED-END FUNDS | | | | |
(Unaudited)
June 30, 2020
The Fund may be subject to local withholding taxes, including those imposed on realized capital gains. Any applicable foreign capital gains tax is accrued daily based upon net unrealized gains, and may be payable following the sale of any applicable investments.
In accordance with U.S. GAAP, the Manager has reviewed the Fund’s tax positions for all open tax years. As of June 30, 2020, the Fund has recorded no liability for net unrecognized tax benefits relating to uncertain income tax positions it has taken or expects to take in future tax returns.
The Fund files U.S. federal, state, and local tax returns as required. The Fund’s tax returns are subject to examination by relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return but which can be extended to six years in certain circumstances. Tax returns for open years have incorporated no uncertain tax positions that require a provision for income taxes.
Under the Regulated Investment Company Modernization Act of 2010, a fund is permitted to carry forward any new capital losses for an unlimited period. Additionally, such capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term under previous law.
As of its last fiscal year ended December 31, 2019, the Fund had the following post-effective capital losses with no expiration (amounts in thousands†):
| | | | | | |
| Short-Term | | | Long-Term | |
| |
| $ | 0 | | | $ | 0 | |
| † | A zero balance may reflect actual amounts rounding to less than one thousand. |
As of June 30, 2020, the aggregate cost and the net unrealized appreciation/(depreciation) of investments for federal income tax purposes are as follows (amounts in thousands†):
| | | | | | | | | | | | | | |
Federal Tax
Cost | | | Unrealized
Appreciation | | | Unrealized
(Depreciation) | | | Net Unrealized
Appreciation/
(Depreciation)(1) | |
| | | |
| $ | 86,402 | | | $ | 5,600 | | | $ | (291) | | | $ | 5,309 | |
| † | A zero balance may reflect actual amounts rounding to less than one thousand. |
| (1) | Primary differences, if any, between book and tax net unrealized appreciation/(depreciation) are attributable to wash sale loss deferrals for federal income tax purposes. |
15. SUBSEQUENT EVENTS
In preparing the financial statements, the Fund’s management has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
On July 1, 2020, the distribution of $ 0.03549 per common share was declared to shareholders payable August 3, 2020 to shareholders of record on July 13, 2020.
On August 3, 2020, the distribution of $0.03549 per common share was declared to shareholders payable September 1, 2020 to shareholders of record on August 13, 2020:
There were no other subsequent events identified that require recognition or disclosure.
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 41 |
Glossary: (abbreviations that may be used in the preceding statements)
(Unaudited)
| | | | | | |
|
| Counterparty Abbreviations: |
| FICC | | Fixed Income Clearing Corporation | | | | |
|
| Currency Abbreviations: |
| USD (or $) | | United States Dollar | | | | |
|
| Municipal Bond or Agency Abbreviations: |
| AGC | | Assured Guaranty Corp. | | FHA | | Federal Housing Administration |
|
| Other Abbreviations: |
| TBA | | To-Be-Announced | | | | |
| | | | | | |
| 42 | | PIMCO CLOSED-END FUNDS | | | | |
Distribution Information
(Unaudited)
For purposes of Section 19 of the Investment Company Act of 1940 (the “Act”), the Fund estimated the periodic sources of any dividends paid during the period covered by this report in accordance with good accounting practice. Pursuant to Rule 19a-1(e) under the Act, the table below sets forth the actual source information for dividends paid during the fiscal period ended June 30, 2020 calculated as of each distribution period pursuant to Section 19 of the Act. The information below is not provided for U.S. federal income tax reporting purposes. The tax character of all dividends and distributions is reported on Form 1099-DIV (for shareholders who receive U.S. federal tax reporting) at the end of each calendar year.
| | | | | | | | | | | | | | | | | | | | |
PIMCO New York Municipal Income
Fund III | | | | | Net Investment
Income* | | | Net Realized
Capital Gains* | | | Paid-in Surplus or
Other Capital
Sources** | | | Total (per
common share) | |
| | | | | |
| January 2020 | | | | | | $ | 0.0355 | | | $ | 0.0000 | | | $ | 0.0000 | | | $ | 0.0355 | |
| | | | | |
| February 2020 | | | | | | $ | 0.0347 | | | $ | 0.0000 | | | $ | 0.0008 | | | $ | 0.0355 | |
| | | | | |
| March 2020 | | | | | | $ | 0.0193 | | | $ | 0.0000 | | | $ | 0.0162 | | | $ | 0.0355 | |
| | | | | |
| April 2020 | | | | | | $ | 0.0235 | | | $ | 0.0000 | | | $ | 0.0120 | | | $ | 0.0355 | |
| | | | | |
| May 2020 | | | | | | $ | 0.0350 | | | $ | 0.0000 | | | $ | 0.0005 | | | $ | 0.0355 | |
| | | | | |
| June 2020 | | | | | | $ | 0.0355 | | | $ | 0.0000 | | | $ | 0.0000 | | | $ | 0.0355 | |
| * | The source of dividends provided in the table differs, in some respects, from information presented in this report prepared in accordance with generally accepted accounting principles, or U.S. GAAP. For example, net earnings from certain interest rate swap contracts are included as a source of net investment income for purposes of Section 19(a). Accordingly, the information in the table may differ from information in the accompanying financial statements that are presented on the basis of U.S. GAAP and may differ from tax information presented in the footnotes. Amounts shown may include accumulated, as well as fiscal period net income and net profits. |
| ** | Occurs when a fund distributes an amount greater than its accumulated net income and net profits. Amounts are not reflective of a fund’s net income, yield, earnings or investment performance. |
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 43 |
Change to Board of Trustees
(Unaudited)
Effective June 11, 2020, the Board of Trustees appointed Mr. Joseph B. Kittredge, Jr. to the Board as a Class III Trustee of the Fund.
| | | | | | |
| 44 | | PIMCO CLOSED-END FUNDS | | | | |
Approval of Investment Management Agreement
(Unaudited)
The Investment Company Act of 1940, as amended (the “1940 Act”), requires that the Board of Trustees (the “Board” or the “Trustees”), including a majority of the Trustees who are not “interested persons,” as that term is defined in the 1940 Act (the “Independent Trustees”), of New York Municipal Income Fund III (the “Fund”), voting separately, annually approve any continuation of the Investment Management Agreement between the Fund and Pacific Investment Management Company LLC (“PIMCO”) (the “Agreement”). At a meeting held by videoconference1 on June 11, 2020 (the “Approval Meeting”), the Board, including the Independent Trustees, considered and unanimously approved the continuation of the Agreement for an additional one-year period commencing on August 1, 2020.
In addition to the Approval Meeting, the annual contract review process with respect to the Agreement also involved multiple planning discussions and meetings of the Contracts Committee of the Board (the “Committee”) (the Approval Meeting, together with such planning discussions and Committee meetings, the “Contract Renewal Meetings”). Throughout the process, the Independent Trustees received legal advice from independent legal counsel that is experienced in 1940 Act matters and independent of PIMCO (“Independent Counsel”), and with whom they met separately from PIMCO during the Contract Renewal Meetings. Representatives from Fund management attended portions of the Contract Renewal Meetings and responded to questions from the Independent Trustees. The Committee also received and reviewed a memorandum from Independent Counsel regarding the Trustees’ responsibilities in evaluating the Agreement.
In connection with their deliberations regarding the proposed continuation of the Agreement, the Trustees, including the Independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to reasonably be necessary to evaluate the terms of the Agreement. The Trustees also considered the nature, quality and extent of the various investment management, administrative and other services performed by PIMCO under the Agreement.
In evaluating the Agreement, the Board, including the Independent Trustees, reviewed extensive materials provided by PIMCO in response to questions submitted by the Independent Trustees and Independent Counsel, and met with senior representatives of PIMCO regarding its personnel, operations, and estimated profitability as they relate to the Fund. The Trustees also considered the broad range of information relevant to the annual contract review that is provided to the Board (including its various standing committees) at meetings throughout the year, including reports on investment performance based on net asset value, common share market price and distribution yield, use of leverage, information regarding share price premiums and/or discounts, portfolio risk, and
1 The Board, including a majority of the Independent Trustees, determined to rely on the relief granted by a temporary exemptive order issued by the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940 that permits fund boards of trustees to approve advisory contracts at a meeting held by remote communications that allows participating trustees to hear one another simultaneously, rather than in-person, in light of the impact of the novel coronavirus (“COVID-19”) pandemic and restrictions on travel and in-person gatherings. The Board determined that reliance on the exemptive order was necessary and appropriate due to circumstances related to current or potential effects of the COVID-19 pandemic and government-mandated restrictions, and prior to commencing the approval meeting, the Board confirmed that all Board members could hear each other simultaneously during the meeting. The Board noted that it would ratify any actions taken at this meeting pursuant to the SEC relief at its next in-person meeting.
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 45 |
Approval of Investment Management Agreement (Cont.)
other portfolio information for the Fund, including the use of derivatives, as well as periodic reports on, among other matters, pricing and valuation; quality and cost of portfolio trade execution; compliance; and shareholder and other services provided by PIMCO and its affiliates. To assist with their review, the Trustees reviewed summaries prepared by PIMCO that analyzed the Fund based on a number of factors, including, fees/expenses, performance, distribution yield, and risk-based factors. Due to the market volatility stemming from the COVID-19 pandemic, the Trustees also requested, received and reviewed summaries updated as of April 30, 2020. They also considered, among other information, performance based on net asset value and market value (both absolute and compared against its Broadridge Performance Universe (as defined below)), investment objective and strategy, portfolio managers, assets under management, outstanding leverage, share price premium and/or discount information, annual fund operating expenses, total expense ratio and management fee comparisons between the Fund and its Broadridge Expense Group (as defined below) and trends in estimated profitability to PIMCO from its advisory relationship with the Fund.
The Trustees’ conclusions as to the continuation of the Agreement were based on a comprehensive consideration of all information provided to the Trustees and were not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, attributing different weights to various factors.
Nature, Extent and Quality of Services
As part of their review, the Trustees received and considered descriptions of various functions performed by PIMCO for the Fund, such as portfolio management, compliance monitoring, portfolio trading practices, and oversight of third-party service providers. They also considered information regarding the overall organization and business functions of PIMCO, including, without limitation, information regarding senior management, portfolio managers and other personnel providing or proposed to provide investment management, administrative and other services, and corporate ownership and business operations unrelated to the Fund. The Trustees examined PIMCO’s abilities to provide high-quality investment management and other services to the Fund. Among other information, the Trustees considered the investment philosophy and research and decision-making processes of PIMCO; the experience of key advisory personnel of PIMCO responsible for portfolio management of the Fund; information regarding the Fund’s use of leverage; the ability of PIMCO to attract and retain capable personnel; the background and capabilities of the senior management and staff of PIMCO; the general process or philosophy for determining employee compensation; and the operational infrastructure, including technology and systems, of PIMCO. The Trustees also considered actions taken by PIMCO to manage the impact on the Fund and its portfolio holdings of recent market volatility.
In addition, the Trustees noted the extensive range of services that PIMCO provides to the Fund beyond investment management services. In this regard, the Trustees reviewed the extent and quality of PIMCO’s services with respect to regulatory compliance and ability to comply with the investment policies of the Fund; the compliance programs and risk controls of PIMCO; the specific contractual obligations of PIMCO pursuant to the Agreement; the nature, extent, and quality of the supervisory and administrative services PIMCO is responsible for providing to the Fund; PIMCO’s risk management function; the time and resources PIMCO expends monitoring the leverage employed by
| | | | | | |
| 46 | | PIMCO CLOSED-END FUNDS | | | | |
(Unaudited)
the Fund, including the covenants and restrictions imposed by certain forms of leverage such as the Fund’s preferred shares; and conditions that might affect PIMCO’s ability to provide high-quality services to the Fund in the future under the Agreement, including, but not limited to, PIMCO’s financial condition and operational stability. The Trustees also took into account the entrepreneurial and business risk PIMCO has undertaken as investment manager and sponsor of the Fund. Specifically, the Trustees considered that PIMCO’s responsibilities include continual management of investment, operational, enterprise, legal, regulatory, and compliance risks as they relate to the Fund. The Trustees also noted PIMCO’s activities under its contractual obligation to coordinate, oversee and supervise the Fund’s various outside service providers, including its negotiation of certain service providers’ fees and its evaluation of service providers’ infrastructure, cybersecurity programs, compliance programs, and business continuity programs, among other matters. The Trustees also considered PIMCO’s ongoing development of its own infrastructure and information technology, including its proprietary software and applications, to support the Fund through, among other things, cybersecurity, business continuity planning, and risk management. The Trustees also considered PIMCO’s effective operation and implementation of its business continuity plan in response to the COVID-19 pandemic and government-mandated restrictions and its oversight of the service providers’ business continuity during this period.
The Trustees concluded that PIMCO’s investment process, research capabilities and philosophy were well suited to the Fund given its investment objective and policies, PIMCO would be able to continue to meet any reasonably foreseeable obligations under the Agreement, and PIMCO would otherwise be able to continue to provide investment and non-investment services to the Fund of an appropriate extent and quality.
Fee and Expense Information
In assessing the reasonableness of the Fund’s fees and expenses under the Agreement, the Trustees considered, among other information, the Fund’s management fee and its total expenses as a percentage of average net assets attributable to common shares and as a percentage of average total managed assets (including assets attributable both to common shares and specified leverage outstanding), in comparison to information about other funds provided by Broadridge Financial Solutions, Inc. (“Broadridge”), including the management fees and other expenses of a smaller sample of comparable funds with different investment advisers identified by Broadridge (the “Broadridge Expense Group”) as well as of a larger sample of comparable funds identified by Broadridge (the “Broadridge Expense Universe”). The total expense ratio information was provided both inclusive and exclusive of interest and borrowing expenses. Comparative fees/expenses reviewed by the Trustees are discussed below. The fee and expense results discussed below were prepared and provided by Broadridge and were not independently verified by the Trustees.
The Trustees considered that the total expense ratio comparisons reflect the effect of expense waivers/reimbursements, if any. The Trustees noted that only leveraged closed-end funds were considered for inclusion in the Broadridge Expense Group and Broadridge Expense Universe.
To the extent applicable, the Trustees considered information regarding the investment performance and fees for other funds and accounts managed by PIMCO, if any, with similar investment strategies to those of the Fund. The Trustees considered information provided by PIMCO indicating that, in
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 47 |
Approval of Investment Management Agreement (Cont.)
comparison to certain other products managed by PIMCO, including open-end funds and exchange-traded funds, there are additional portfolio management challenges in managing closed-end funds such as the Fund. For example, the challenges associated with managing closed-end funds may include investing in less liquid holdings, the use of leverage, issues relating to trading on a national securities exchange and managing the funds’ dividend practices. In addition, the Independent Trustees considered information provided by PIMCO as to the generally broader and more extensive services provided to the Fund in comparison to those provided to private funds or institutional or separate accounts; the higher demands placed on PIMCO to provide considerable shareholder services due to the volume of investors; the greater entrepreneurial, enterprise, and reputational risk in managing registered closed-end funds; and the impact on PIMCO and expenses associated with the more extensive regulatory and compliance requirements to which the Fund is subject in comparison to private funds or institutional or separate accounts. The Trustees were advised by PIMCO that, in light of these additional challenges and additional services, different pricing structures between closed-end funds and other products managed by PIMCO are to be expected, and that comparisons of pricing structures across these products may not always be apt comparisons, even where other products have similar investment objectives and strategies to those of the Fund.
The Trustees also took into account that the Fund has preferred shares outstanding, which increases the amount of management fees payable by the Fund under the Agreement (because the Fund’s fees are calculated based on net assets, including assets attributable to preferred shares outstanding). In this regard, the Trustees took into account that PIMCO has a financial incentive for the Fund to continue to use leverage (in the form of preferred shares), which may create a conflict of interest between PIMCO, on one hand, and the Fund’s common shareholders, on the other. Therefore, the Trustees noted that the total fees paid by the Fund to PIMCO under the Fund’s unitary fee arrangement would therefore vary more with increases and decreases in applicable leverage attributable to preferred shares incurred by the Fund than under a non-unitary fee arrangement, all other things being equal. The Trustees considered information provided by PIMCO and related presentations as to why the Fund’s use of leverage continues to be appropriate and in the best interests of the Fund under current market conditions. The Trustees considered that they receive information from PIMCO each quarter comparing the recent, historical and projected costs of the Fund’s existing leverage arrangements against other available financing options, as well as information relating to PIMCO’s views regarding economic or other risks of maintaining those leverage arrangements and/or replacing them with alternate forms of financing. The Trustees also considered PIMCO’s representation that it will use leverage for the Fund solely as it determines to be in the best interests of the Fund from an investment perspective and without regard to the level of compensation PIMCO receives.
The Trustees noted that, the contractual management fee rate for the Fund under its unitary fee arrangement was above the median contractual management fees of the other funds in its Broadridge Expense Group, calculated both on average net assets and on average total managed assets. However, in this regard, the Trustees took into account that the Fund’s unitary fee arrangement covers substantially all of the Fund’s operating fees and expenses (“Operating Expenses”), and therefore, all other things being equal, would tend to be higher than the contractual management fee rates of other funds in the applicable Broadridge Expense Group, which generally do not have a unitary fee structure and bear Operating Expenses directly and in addition to the
| | | | | | |
| 48 | | PIMCO CLOSED-END FUNDS | | | | |
(Unaudited)
management fee. The Trustees determined that a review of the Fund’s total expense ratio with the total expense ratios of peer funds would generally provide more meaningful comparisons than considering contractual management fee rates in isolation.
In this regard, the Trustees noted PIMCO’s view that the unitary fee arrangement has benefited and will continue to benefit common shareholders because it provides an expense structure (including Operating Expenses) that is essentially fixed for the duration of the contractual period as a percentage of net asset value (including daily net assets attributable to any preferred shares of the fund that may be outstanding), making it more predictable under ordinary circumstances in comparison to other fee and expense structures, under which the Fund’s Operating Expenses (including certain third-party fees and expenses) could vary significantly over time. The Trustees also considered that the unitary fee arrangement generally insulates the Fund and common shareholders from increases in applicable third-party and certain other expenses because PIMCO, rather than the Fund, would bear the risk of such increases (though the Trustees also noted that PIMCO would benefit from any reductions in such expenses).
Performance Information
Comparative performance results for the Fund reviewed by the Trustees are discussed below. With respect to investment performance, the Trustees considered information regarding the Fund’s short-, intermediate- and long-term performance based on net asset value and market value, as applicable, net of the Fund’s fees and expenses, both on an absolute basis and relative to the performance of its Broadridge Performance Universe (as defined below). The Trustees considered information provided by Broadridge for the Fund regarding the investment performance of a group of funds with investment classifications/objectives comparable to those of the Fund (the “Broadridge Performance Universe”). The comparative performance information was prepared and provided by Broadridge and was not independently verified by the Trustees. The Trustees also considered information regarding the Fund’s comparative yields and risk-adjusted returns. The Independent Trustees recognized that the performance information, including the Broadridge performance information, was as of December 31, 2019, and, as such, did not include the period of extreme market volatility resulting from the COVID-19 pandemic. For this reason, they requested, received, and reviewed more recent performance information from PIMCO as of March 31, 2020. The Trustees considered information from PIMCO regarding the risks undertaken by the Fund, including the use of leverage, and PIMCO’s management and oversight of the Fund’s risk profile, including in instances where the Fund outperformed its Broadridge Performance Universe.
In addition, the Trustees considered matters bearing on the Fund and its advisory arrangement at their meetings throughout the year, including a review of performance data at each regular meeting (by both the Board and its Performance Committee).
Profitability, Economies of Scale, and Fall-out Benefits
The Trustees considered estimated profitability analyses provided by PIMCO, which included, among other information, (i) PIMCO’s estimated pre- and post-distribution operating margin for the Fund, as well as PIMCO’s estimated pre- and post-distribution operating margin for all of the closed-end funds advised by PIMCO, including the Fund (collectively, the “Estimated Margins”), in each case for the one-year period ended December 31, 2019; (ii) a year-over-year comparison of PIMCO’s
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 49 |
Approval of Investment Management Agreement (Cont.)
Estimated Margins for the one-year periods ended December 31, 2019, and December 31, 2018; and (iii) an overview of PIMCO’s average fee rates with respect to all of the closed-end funds advised by PIMCO, including the Fund, compared to PIMCO’s average fee rates with respect to its other clients, including PIMCO-advised separate accounts, open-end funds and hedge funds and private equity funds. The Trustees also took into account explanations from PIMCO regarding how certain of PIMCO’s corporate and shared expenses were allocated among the Fund and other funds and accounts managed by PIMCO for purposes of developing profitability estimates. Based on the profitability analyses provided by PIMCO, the Trustees determined, taking into account the various assumptions made, that such profitability did not appear to be excessive.
The Trustees also considered information regarding possible economies of scale in the operation of the Fund. The Trustees took into account that the Fund does not currently have any breakpoints in its management fees. The Trustees considered that, as a closed-end investment company, the Fund does not continually offer new shares to raise additional assets (as does a typical open-end investment company), but may raise additional assets through follow-on offerings and dividend reinvestments and may also experience asset growth through investment performance and/or the increased use of leverage. The Trustees noted PIMCO’s assertion that it may share the benefits of potential economies of scale, if any, with the Fund and its shareholders in a number of ways, including investing in portfolio and trade operations management, firm technology, middle and back office support, legal and compliance, and fund administration logistics; senior management supervision and governance of those services; and the enhancement of services provided to the Fund in return for fees paid. The Trustees also considered that the unitary fee arrangement provides inherent economies of scale because the Fund maintains competitive fixed unitary fees even if its assets decline and/or operating costs rise. The Trustees further considered that, in contrast, breakpoints are a proxy for charging higher fees on lower asset levels and that when a fund’s assets decline, breakpoints may reverse, which causes expense ratios to increase. The Trustees also considered that, unlike the Fund’s unitary fee arrangement, funds with “pass through” administrative fee structures may experience increased expense ratios when fixed dollar fees are charged against declining fund assets. The Trustees also considered that the unitary fee arrangement protects shareholders, during the contractual period, from a rise in operating costs that may result from, among other things, PIMCO’s investments in various business enhancements and infrastructure. The Trustees noted that PIMCO has made extensive investments in these areas.
Additionally, the Trustees considered so-called “fall-out benefits” to PIMCO, such as reputational value derived from serving as investment manager to the Fund and research, statistical and quotation services PIMCO may receive from broker-dealers executing the Fund’s portfolio transactions on an agency basis.
Fund Performance and Fee/Expense Analysis
With regard to the investment performance of the Fund and the fees charged to the Fund, the Board considered the following information. With respect to performance quintile rankings for the Fund compared to its Broadridge Performance Universe, the first quintile represents the highest (best) performance and the fifth quintile represents the lowest performance.
| | | | | | |
| 50 | | PIMCO CLOSED-END FUNDS | | | | |
(Unaudited)
With respect to the Fund’s common share total return performance (based on net asset value) relative to its respective Broadridge Performance Universe, consisting of 18 funds for one-year, three-year, five-year and ten-year performance, the Trustees noted that the Fund had first quintile performance for the one-year, three-year, five-year and ten-year periods ended December 31, 2019.
The Trustees noted that, including the Fund, the Broadridge Expense Group for the Fund consisted of a total of 6 funds and the Broadridge Expense Universe for the Fund consisted of a total of 18 funds. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on both average total managed assets and average net assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its Broadridge Expense Group and Broadridge Expense Universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on both average total managed assets and average net assets was above the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Broadridge Expense Group and Broadridge Expense Universe.
Conclusion
After reviewing these and other factors described herein, the Trustees concluded, with respect to the Fund, within the context of their overall conclusions regarding the Agreement, and based on the information provided and related representations made by management, and in their business judgment, that they were satisfied with PIMCO’s responses and efforts relating to the investment performance of the Fund. The Trustees also concluded that the fees payable under the Agreement represent reasonable compensation in light of the nature, extent and quality of services provided by PIMCO. Based on their evaluation of factors that they deemed to be material, including, but not limited to, those factors described above, the Trustees, including the Independent Trustees, unanimously concluded that the continuation of the Agreement was in the interests of the Fund and its shareholders, and should be approved.
| | | | | | |
| | SEMIANNUAL REPORT | | JUNE 30, 2020 | | 51 |
General Information
Investment Manager
Pacific Investment Management Company LLC
650 Newport Center Drive
Newport Beach, CA 92660
Custodian
State Street Bank and Trust Company
801 Pennsylvania Avenue
Kansas City, MO 64105
Transfer Agent, Dividend Paying Agent and Registrar for Common Shares
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Auction Agent, Transfer Agent, Dividend Paying Agent and Registrar for Auction Rate Preferred Shares
Deustsche Bank Company Americas
60 Wall Street, MS 2715
New York, New York 10005
Legal Counsel
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, MA 02199
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
1100 Walnut Street, Suite 1300
Kansas City, MO 64106
This report is submitted for the general information of the shareholders of the Fund listed on the report cover.
CEF4015SAR_063020
The information required by this Item 2 is only required in an annual report on this Form N-CSR.
| Item 3. | Audit Committee Financial Expert. |
The information required by this Item 3 is only required in an annual report on this Form N-CSR.
| Item 4. | Principal Accountant Fees and Services. |
The information required by this Item 4 is only required in an annual report on this Form N-CSR.
| Item 5. | Audit Committee of Listed Registrants. |
The information required by this Item 5 is only required in an annual report on this Form N-CSR.
| Item 6. | Schedule of Investments. |
The information required by this Item 6 is included as part of the semiannual report to shareholders filed under Item 1 of this Form N-CSR.
| Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
The information required by this Item 7 is only required in an annual report on this Form N-CSR.
| Item 8. | Portfolio Managers of Closed-End Management Investment Companies. |
| | (a) | The information required by this Item 8(a) is only required in an annual report on this Form N-CSR. |
| | (b) | There have been no changes in any of the Portfolio Managers identified in the registrant’s previous annual report on Form N-CSR. |
| Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
None.
| Item 10. | Submission of Matters to a Vote of Security Holders. |
There have been no material changes to the procedures by which shareholders may recommend nominees to the Fund’s Board of Trustees since the Fund last provided disclosure in response to this item.
| Item 11. | Controls and Procedures. |
| | (a) | The principal executive officer and principal financial & accounting officer have concluded as of a date within 90 days of the filing date of this report, based on their evaluation of the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the 1940 Act), that the design of such procedures is effective to provide reasonable assurance that material information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. |
| | (b) | There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the last fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
| Item 12. | Disclosure of Securities Lending Activities for Closed-End Management Investment Companies. |
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
| PIMCO New York Municipal Income Fund III |
| |
| By: | | /s/ Eric D. Johnson |
| | Eric D. Johnson |
| | President (Principal Executive Officer) |
Date: August 26, 2020 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | |
| By: | | /s/ Eric D. Johnson |
| | Eric D. Johnson |
| | President (Principal Executive Officer) |
Date: August 26, 2020 |
| | |
| |
| By: | | /s/ Bradley Todd |
| | Bradley Todd |
| | Treasurer (Principal Financial & Accounting Officer) |
Date: August 26, 2020 |
