Solid Yield, Impressive Return From Pimco Income
As its name suggests, the primary mission of Pimco Income (symbol PONDX) is to deliver cash to its shareholders. Yielding 4.3%, the fund can fairly claim mission accomplished. But the fund is also no slouch when it comes to total return. Over the past year through November 26, Pimco Income returned 21.4%, putting it in the top 2% of multisector bond funds and beating the Barclays U.S. Aggregate Bond index by 16 percentage points.
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Indeed, manager Daniel Ivascyn makes his priority clear: "I can't stress enough that we never want to generate income at the expense of total return. We never want to do something dumb, like buy a bond with a high yield if we think it will go down in price."
The fund, which launched in March 2007, has a spiffy five-year record, too. Over that period, it returned 11.5% annualized. That outpaced the Barclays index by an average of 5.5 percentage points per year and the average multisector bond fund by 4.7 points per year. And Income has been remarkably consistent: It has been in the top 10% of its category in four of the past five calendar years (including 2012).
As a multisector fund, Income can invest in the gamut of fixed-income classes, including Treasuries, junk bonds, mortgage securities and foreign debt. At last report, the fund held more than 3,500 bonds spread among asset-backed securities, government and corporate debt, and bank loans.
Ivascyn, who has run Income since its inception, has made a big bet on mortgage securities (more than one-third of assets). Although some of these bonds are backed by the government, such as securities issued by Fannie Mae and Freddie Mac, many are not. These private, "non-agency" mortgage pools were battered during the housing crisis, creating "tremendous opportunity" for firms, such as Pimco, with strong analytical skills, says Ivascyn. He holds the most-senior non-agency mortgage securities -- those that get paid first and that, therefore, have the least risk of default.
Ivascyn also holds big stakes in bonds in developed foreign markets, especially Australia, where ten-year government bonds recently yielded 3.3%. Not only do Aussie bonds pay about 1.6 percentage points more than comparable U.S. debt, they also provide diversification benefits, says Ivascyn. He adds that the bonds act as a "pretty good hedge" against a slowdown in China or the rest of the global economy. Ivascyn sees similar benefits from his fund's small stake in bonds from Brazil and Mexico. Those bonds should hold up even if other global economies falter.
Income's average duration, a measure of interest-rate sensitivity, is 3.5 years. That suggests the fund would lose 3.5% if interest rates were to rise one percentage point. The average maturity of the fund's holdings is 5.7 years.
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