UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
Investment Company Act file number 811-07816
PCM Fund, Inc.
(Exact name of registrant as specified in charter)
| 1633 Broadway New York, New York 10019 | ||
| (Address of principal executive offices) (Zip code) | ||
Lawrence G. Altadonna—1633 Broadway New York, New York 10019
(Name and address of agent for service)
Registrant’s telephone number, including area code: 212-739-3371
Date of fiscal year end: December 31, 2012
Date of reporting period: September 30, 2012
| Item 1. | Schedule of Investments |
PCM Fund, Inc.
Schedule of Investments
September 30, 2012 (unaudited)
PCM Fund, Inc.
Schedule of Investments
September 30, 2012 (unaudited) (continued)
PCM Fund, Inc.
Schedule of Investments
September 30, 2012 (unaudited) (continued)
PCM Fund, Inc.
Schedule of Investments
September 30, 2012 (unaudited) (continued)
Other Investments:
| (A) | OTC credit default swap agreements: |
Sell protection swap agreements outstanding at September 30, 2012 (1):
| Swap Counterparty/Referenced Debt Issuer |
Notional Amount (000s) (3) |
Credit Spread (2) |
Termination Date |
Payments Received |
Market Value (4) |
Upfront Premiums Paid(Received) |
Unrealized Appreciation (Depreciation) |
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| Citigroup: |
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| SLM |
$ | 1,700 | 0.86 | % | 12/20/13 | 5.00 | % | $ | 89,055 | $ | 146,950 | $ | (57,895 | ) | ||||||||||||||
| SLM |
500 | 0.86 | % | 12/20/13 | 5.00 | % | 26,193 | (78,750 | ) | 104,943 | ||||||||||||||||||
| Deutsche Bank: |
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| SLM |
500 | 0.86 | % | 12/20/13 | 5.00 | % | 26,193 | (61,250 | ) | 87,443 | ||||||||||||||||||
| SLM |
3,000 | 3.67 | % | 3/20/19 | 5.35 | % | 279,158 | — | 279,158 | |||||||||||||||||||
| Royal Bank of Scotland: |
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| Markit ABX.HE Index |
2,760 | † | 8/25/37 | 0.09 | % | (1,125,686 | ) | (1,366,082 | ) | 240,396 | ||||||||||||||||||
| Markit ABX.HE Index |
3,056 | † | 7/25/45 | 0.18 | % | (184,923 | ) | (305,632 | ) | 120,709 | ||||||||||||||||||
| Markit ABX.HE Index |
6,826 | † | 7/25/45 | 0.32 | % | (3,003,278 | ) | (4,010,712 | ) | 1,007,434 | ||||||||||||||||||
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| $ | (3,893,288 | ) | $ | (5,675,476 | ) | $ | 1,782,188 | |||||||||||||||||||||
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OTC—Over-the-Counter
| † | Credit Spread not quoted for asset-backed securities. |
| (1) | If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index. |
| (2) | Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. |
| (3) | This represents the maximum potential amount the Fund could be required to make available as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement. |
| (4) | The quoted market prices and resulting values for credit default swap agreements serve as an indicator of the status at September 30, 2012 of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement been closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. |
At September 30, 2012, the Fund held $260,000 in cash as collateral for derivatives. Cash collateral held may be invested in accordance with the Fund’s investment strategy.
| (B) | Open reverse repurchase agreements at September 30, 2012: |
| Counterparty |
Rate | Trade Date |
Due Date | Principal & Interest |
Principal | |||||||||||||||
| Barclays Bank |
0.55 | % | 9/24/12 | 12/24/12 | $ | 882,094 | $ | 882,000 | ||||||||||||
| 0.60 | % | 8/27/12 | 11/27/12 | 887,517 | 887,000 | |||||||||||||||
| 0.60 | % | 8/28/12 | 11/27/12 | 345,196 | 345,000 | |||||||||||||||
| 0.60 | % | 9/24/12 | 12/24/12 | 1,091,127 | 1,091,000 | |||||||||||||||
| 0.65 | % | 9/14/12 | 10/18/12 | 631,194 | 631,000 | |||||||||||||||
| 0.75 | % | 9/24/12 | 12/24/12 | 989,143 | 989,000 | |||||||||||||||
| 0.75 | % | 9/25/12 | 12/24/12 | 355,044 | 355,000 | |||||||||||||||
| 0.80 | % | 7/20/12 | 10/22/12 | 717,162 | 716,000 | |||||||||||||||
| 0.80 | % | 8/23/12 | 11/26/12 | 550,477 | 550,000 | |||||||||||||||
| 0.867 | % | 9/25/12 | 10/11/12 | 1,629,235 | 1,629,000 | |||||||||||||||
| 0.90 | % | 8/24/12 | 2/25/13 | 6,440,112 | 6,434,000 | |||||||||||||||
| 1.062 | % | 9/27/12 | 12/21/12 | 2,106,249 | 2,106,000 | |||||||||||||||
| 1.15 | % | 8/24/12 | 2/25/13 | 4,258,163 | 4,253,000 | |||||||||||||||
| 1.294 | % | 8/1/12 | 11/1/12 | 1,393,048 | 1,390,000 | |||||||||||||||
| Citigroup |
0.969 | % | 9/20/12 | 10/19/12 | 1,427,423 | 1,427,000 | ||||||||||||||
| Credit Suisse First Boston |
0.55 | % | 9/18/12 | 12/18/12 | 1,082,215 | 1,082,000 | ||||||||||||||
| Deutsche Bank |
0.77 | % | 9/17/12 | 12/17/12 | 3,903,168 | 3,902,000 | ||||||||||||||
| 0.80 | % | 8/16/12 | 11/16/12 | 3,277,347 | 3,274,000 | |||||||||||||||
| 0.80 | % | 8/17/12 | 11/19/12 | 1,798,797 | 1,797,000 | |||||||||||||||
| 0.80 | % | 8/28/12 | 11/28/12 | 1,034,781 | 1,034,000 | |||||||||||||||
| JPMorgan Chase |
0.80 | % | 8/22/12 | 11/21/12 | 531,472 | 531,000 | ||||||||||||||
| Morgan Stanley |
1.25 | % | 7/10/12 | 10/10/12 | 7,392,243 | 7,371,000 | ||||||||||||||
| Royal Bank of Canada |
1.381 | % | 9/19/12 | 12/19/12 | 3,076,416 | 3,075,000 | ||||||||||||||
| 1.937 | % | 6/12/12 | 12/11/12 | 690,097 | 686,000 | |||||||||||||||
| Royal Bank of Scotland |
0.60 | % | 8/17/12 | 11/20/12 | 2,339,754 | 2,338,000 | ||||||||||||||
| 0.967 | % | 9/25/12 | 10/25/12 | 924,149 | 924,000 | |||||||||||||||
| 0.971 | % | 9/18/12 | 10/18/12 | 6,328,218 | 6,326,000 | |||||||||||||||
| 0.974 | % | 9/17/12 | 10/17/12 | 2,608,988 | 2,608,000 | |||||||||||||||
| 0.978 | % | 9/10/12 | 10/9/12 | 7,235,125 | 7,231,000 | |||||||||||||||
| 0.978 | % | 9/12/12 | 10/11/12 | 916,473 | 916,000 | |||||||||||||||
| 1.121 | % | 9/18/12 | 10/18/12 | 1,950,789 | 1,950,000 | |||||||||||||||
| 1.136 | % | 9/26/12 | 10/25/12 | 983,155 | 983,000 | |||||||||||||||
| 1.216 | % | 9/28/12 | 10/31/12 | 2,031,000 | 2,031,000 | |||||||||||||||
| 1.217 | % | 9/25/12 | 10/24/12 | 5,631,142 | 5,630,000 | |||||||||||||||
| 1.217 | % | 9/25/12 | 10/25/12 | 1,019,207 | 1,019,000 | |||||||||||||||
| 1.217 | % | 9/27/12 | 10/26/12 | 1,567,212 | 1,567,000 | |||||||||||||||
| 1.221 | % | 9/18/12 | 10/18/12 | 1,013,447 | 1,013,000 | |||||||||||||||
| 1.231 | % | 9/4/12 | 10/1/12 | 2,029,872 | 2,028,000 | |||||||||||||||
| 1.236 | % | 9/26/12 | 10/25/12 | 4,949,850 | 4,949,000 | |||||||||||||||
| 1.399 | % | 9/14/12 | 12/14/12 | 6,218,105 | 6,214,000 | |||||||||||||||
| UBS |
0.52 | % | 9/18/12 | 12/18/12 | 1,261,237 | 1,261,000 | ||||||||||||||
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| $ | 95,425,000 | |||||||||||||||||||
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The weighted average daily balance of reverse repurchase agreements outstanding during the year ended September 30, 2012 was $92,230,865 at a weighted average interest rate of 1.09%. The total market value of underlying collateral (refer to the Schedule of Investments for positions transferred for the benefit of the counterparty as collateral) for open reverse repurchase agreements at September 30, 2012 was $106,672,673.
At September 30, 2012, the Fund held $171,583 in principal value of U.S. Treasury Bills, and $470,000 in principal value of Mortgage-Backed Securities, respectively, as collateral for reverse repurchase agreements. Securities held as collateral will not be pledged and are not reflected in the Fund’s Schedule of Investments.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. The three levels of the fair value hierarchy are described below:
| • | Level 1 – quoted prices in active markets for identical investments that the Fund has the ability to access |
| • | Level 2 – valuations based on other significant observable inputs, which may include, but are not limited to, quoted prices for similar assets or liabilities, interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates or other market corroborated inputs |
| • | Level 3 – valuations based on significant unobservable inputs (including the Sub-Adviser’s or Valuation Committee’s own assumptions and single broker quotes in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following are certain inputs and techniques that the Fund generally uses to evaluate how to classify each category of assets and liabilities for Level 2 and Level 3.
Equity Securities (Common and Preferred Stock)—Equity securities traded in inactive markets are valued using inputs which include broker-dealer quotes, recently executed transactions adjusted for changes in the benchmark index, or evaluated price quotes received from independent pricing services that take into account the integrity of the market sector and issuer, the individual characteristics of the security, and information received from broker-dealers and other market sources pertaining to the issuer or security. To the extent that these inputs are observable, the values of equity securities are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
U.S. Treasury Obligations—U.S. Treasury obligations are valued by independent pricing services based on pricing models that evaluate the mean between the most recently quoted bid and ask price. The models also take into consideration data received from active market makers and broker-dealers, yield curves, and the spread over comparable U.S. Treasury issues. The spreads change daily in response to market conditions and are generally obtained from the new issue market and broker-dealer sources. To the extent that these inputs are observable, the values of U.S. Treasury obligations are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Government Sponsored Enterprise and Mortgage-Backed Securities—Government sponsored enterprise and mortgage-backed securities are valued by independent pricing services using pricing models based on inputs that include issuer type, coupon, cash flows, mortgage prepayment projection tables and Adjustable Rate Mortgage evaluations that incorporate index data, periodic and life caps, the next coupon reset date, and the convertibility of the bond. To the extent that these inputs are observable, the values of government sponsored enterprise and mortgage-backed securities are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Municipal Bonds—Municipal bonds are valued by independent pricing services based on pricing models that take into account, among other factors, information received from market makers and broker-dealers, current trades, bid-want lists, offerings, market movements, the callability of the bond or note, state of issuance, benchmark yield curves, and bond or note insurance. To the extent that these inputs are observable, the values of municipal bonds are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Corporate Bonds & Notes—Corporate bonds & notes are generally comprised of two main categories: investment grade bonds and high yield bonds. Investment grade bonds are valued by independent pricing services using various inputs and techniques, which include broker-dealer quotations, live trading levels, recently executed transactions in securities of the issuer or comparable issuers, and option adjusted spread models that include base curve and spread curve inputs. Adjustments to individual bonds can be applied to recognize trading differences compared to other bonds issued by the same issuer. High yield bonds are valued by independent pricing services based primarily on broker-dealer quotations from relevant market makers and recently executed transactions in securities of the issuer or comparable issuers. The broker-dealer quotations received are supported by credit analysis of the issuer that takes into consideration credit quality assessments, daily trading activity, and the activity of the underlying equities, listed bonds and sector-specific trends. To the extent that these inputs are observable, the values of corporate bonds & notes are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Asset-Backed Securities and Collateralized Mortgage Obligations—Asset-backed securities and collateralized mortgage obligations are valued by independent pricing services using pricing models based on a security’s average life volatility. The models also take into account tranche characteristics such as coupon, average life, collateral types, ratings, the issuer and tranche type, underlying collateral and performance of the collateral, and discount margin for certain floating rate issues. To the extent that these inputs are observable, the values of asset-backed securities and collateralized mortgage obligations are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Credit Default Swaps—OTC credit default swaps are valued by independent pricing services using pricing models that take into account, among other factors, information received from market makers and broker-dealers, default probabilities from index specific credit spread curves, recovery rates, and cash flows. To the extent that these inputs are observable, the values of OTC credit default swaps are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
The valuation techniques used by the Fund to measure fair value during the nine months ended September 30, 2012 were intended to maximize the use of observable inputs and to minimize the use of unobservable inputs.
The Fund’s policy is to recognize transfers between levels at the end of the reporting period. An investment asset’s or liability’s level within the fair value hierarchy is based on the lowest level input, individually or in the aggregate, that is significant to the fair value measurement. The objective of fair value measurement remains the same even when there is a significant decrease in the volume and level of activity for an asset or liability and regardless of the valuation techniques used. Assets categorized as Level 1 or 2 as of period end may have been transferred between Levels 1 and 2 since the prior period due to changes in the valuation method utilized in valuing the investments.
A summary of the inputs used at September 30, 2012 in valuing the Fund’s assets and liabilities is listed below (refer to the Schedule of Investments and Other Investments for detailed information on Investments in Securities and Other Financial Instruments):
| Level 1 - Quoted Prices |
Level 2 - Other Significant Observable Inputs |
Level 3 - Significant Unobservable Inputs |
Value at 9/30/12 |
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| Investments in Securities—Assets |
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| Mortgage-Backed Securities |
— | $ | 161,518,037 | $ | 5,600,437 | $ | 167,118,474 | |||||||||
| Corporate Bonds & Notes: |
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| Airlines |
— | 284,386 | 2,544,215 | 2,828,601 | ||||||||||||
| All Other |
— | 34,042,421 | — | 34,042,421 | ||||||||||||
| Asset-Backed Securities |
— | 10,756,601 | 109,830 | 10,866,431 | ||||||||||||
| U.S. Government Agency Securities |
— | 2,460,016 | — | 2,460,016 | ||||||||||||
| Municipal Bonds |
— | 1,906,087 | — | 1,906,087 | ||||||||||||
| Common Stock |
$ | 47,675 | — | — | 47,675 | |||||||||||
| Warrants |
18,289 | — | 11 | 18,300 | ||||||||||||
| Short-Term Investments |
— | 7,375,896 | — | 7,375,896 | ||||||||||||
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| Total Investments in Securities—Assets |
$ | 65,964 | $ | 218,343,444 | $ | 8,254,493 | $ | 226,663,901 | ||||||||
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| Other Financial Instruments*—Assets |
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| Credit Contracts |
— | $ | 1,840,083 | — | $ | 1,840,083 | ||||||||||
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| Other Financial Instruments*—Liabilities |
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| Credit Contracts |
— | $ | (57,895 | ) | — | $ | (57,895 | ) | ||||||||
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| Total Investments |
$ | 65,964 | $ | 220,125,632 | $ | 8,254,493 | $ | 228,446,089 | ||||||||
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At September 30, 2012, securities valued at $18,290 was transferred from Level 2 to Level 1 due to the availability of quoted prices in an active market.
A roll forward of fair value measurements using significant unobservable inputs (Level 3) for the nine months ended September 30, 2012, was as follows:
| Beginning Balance 12/31/11 |
Purchases | Sales | Accrued Discounts (Premiums) |
Net Realized Gain (Loss) |
Net Change in Unrealized Appreciation/ Depreciation |
Transfers into Level 3** |
Transfers out of Level 3*** |
Ending Balance 9/30/12 |
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| Investments in Securities—Assets |
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| Mortgage-Backed Securities |
$ | 1,460,808 | $ | 37,240 | $ | (618,129 | ) | $ | 18,338 | $ | 309,890 | $ | 110,150 | $ | 4,319,867 | $ | (37,727 | ) | $ | 5,600,437 | ||||||||||||||||
| Corporate Bonds & Notes: |
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| Airlines |
2,941,661 | — | (244,003 | ) | 203 | 6,985 | 123,755 | — | (284,386 | ) | 2,544,215 | |||||||||||||||||||||||||
| Asset-Backed Securities |
— | — | — | — | — | — | 109,830 | — | 109,830 | |||||||||||||||||||||||||||
| Warrants: |
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| Construction & Engineering |
— | 11 | — | — | — | — | — | — | 11 | |||||||||||||||||||||||||||
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| Total Investments |
$ | 4,402,469 | $ | 37,251 | $ | (862,132 | ) | $ | 18,541 | $ | 316,875 | $ | 233,905 | $ | 4,429,697 | $ | (322,113 | ) | $ | 8,254,493 | ||||||||||||||||
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The following table presents additional information about valuation techniques and inputs used for investments that are measured at fair value and categorized within Level 3 at September 30, 2012:
| Investments in Securities—Assets |
Ending Balance at 9/30/12 |
Valuation Technique Used |
Unobservable |
Input Values | ||||||||
| Mortgage-Backed Securities |
$ | 4,454,051 | Benchmark Pricing | Security Price Reset | $ | 0.55-105.36 | ||||||
| 1,146,386 | Third-Party Pricing Vendor | Single Broker Quotes | $ | 88.25-100.00 | ||||||||
| Corporate Bonds & Notes |
2,544,215 | Third-Party Pricing Vendor | Single Broker Quotes | $ | 104.5-115.25 | |||||||
| Asset-Backed Securities |
109,830 | Benchmark Pricing | Security Price Reset | $ | 5.92 | |||||||
| Warrants |
11 | Portfolio Manager Recommendation | Stale Pricing | $ | 0.01 | |||||||
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| Total Investments |
$ | 8,254,493 | ||||||||||
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| * | Other financial instruments are derivatives not reflected in the Schedule of Investments, such as swap agreements which are valued at the unrealized appreciation (depreciation) of the instrument. |
| ** | Transferred out of Level 2 into Level 3 because evaluated prices provided by a third-party pricing vendor was not available. |
| *** | Transferred out of Level 3 into Level 2 because evaluated prices from a third-party pricing vendor became available. |
The net change in unrealized appreciation/depreciation of Level 3 investments which the Fund held at September 30, 2012 was $440,729.
| Item 2. | Controls and Procedures |
(a) The registrant’s President & Chief Executive Officer and Treasurer, Principal Financial & Accounting Officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Act (17 CFR270.3a-3(c))), are effective based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this document.
(b) There were no significant changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR270.30a-3(d))) that occurred during the registrant’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
| Item 3. | Exhibits |
(a) Exhibit 99.302 Cert.—Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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.
| Registrant: PCM Fund, Inc. | ||
| By | /s/ Brian S. Shlissel | |
| President & Chief Executive Officer | ||
| Date: November 23, 2012 | ||
| By | /s/ Lawrence G. Altadonna | |
| Treasurer, Principal Financial & Accounting Officer | ||
| Date: November 23, 2012 | ||
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/ Brian S. Shlissel | |
| President & Chief Executive Officer | ||
| Date: November 23, 2012 | ||
| By | /s/ Lawrence G. Altadonna | |
| Treasurer, Principal Financial & Accounting Officer | ||
| Date: November 23, 2012 | ||