Fund Watch
The Secret of Pimco Commodity's Success
Investing in Treasury inflation-protected securities has paid off for this member of the Kiplinger 25.
By Andrew Tanzer, Senior Associate Editor, Kiplinger's Personal Finance
December 2, 2009
Commodities have been strong this year, but not as strong as the return suggested by Pimco CommodityRealReturn Strategy (symbol PCRDX). Year-to-date through November 30, the fund, a member of the Kiplinger 25, gained 38.3%, a stunning 22 percentage points more than the benchmark it purports to follow, the Dow Jones–UBS Commodity Index. How to explain?
Most of the discrepancy is related to the way Pimco structured this somewhat complex fund. The DJ–UBS index holds a basket of futures contracts on 19 commodities from the energy, metals and agribusiness sectors. When Pimco puts down the collateral that backs its commodity futures positions, it chooses how to invest those dollars.
From the fund’s inception in 2002, Pimco chose to invest the collateral in Treasury inflation-protected securities, or TIPS, and to actively manage those bond holdings. Mihir Worah, manager of Pimco CommodityRealReturn, is also the manager of Pimco Real Return, which invests primarily in TIPS.
Worah says that because TIPS are also having a super year, the decision to invest the collateral in TIPS (as opposed, say, to investing in three-month Treasury bills) has added ten percentage points to CommodityRealReturn’s gain this year. By contrast, a poor TIPS market in 2008 detracted from performance last year.
Worah’s skill in managing TIPS has added another eight points (Real Return has beaten the TIPS index by eight points so far this year). And he says that some light management of the commodity positions has tacked on another point or two over the index. Over the past five years, incidentally, the fund returned 1.3% annualized, beating the commodity index by an average 0.8 percentage point per year.
Over the medium to long term, Worah says, he’s bullish on commodities. Pimco expects higher inflation in three to five years, and Worah notes that hundreds of millions of new consumers from places such as China and India will underpin robust demand for commodities, some of which are constrained by tight supply. “Most people are underinvested in inflation hedges,” he says.
But for the next three to six months, Worah says, he’s mildly bearish on both TIPS and commodities, which he thinks have risen faster than the slow pace of economic recovery justifies. In fact, he’s moved some of his collateral out of TIPS and into medium-maturity Treasuries, corporate bonds and foreign debt.
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Reader Comments (3)
Posted by: Limoman at 12/02/2009 11:13:02 AM
Well maybe.. but looking at PCRDX vs VIPSX for the past 3 yrs? Doesn't look too good for PCRDX.. now does it? and for past 5 and 10 yrs? Take out that that 1.35% fee they have and they aren' t doing That musch better than VIPSX, now are they? Of course, I'm sure Pimco does more Advertising with you than Vanguard or do they give you more Access to them? Thus your obligated to Promote PimPco? Ditto on the Foreign Debt or EMD's.. They were the Main stay of the Last recovery of 03' and , gee, they are again this time around... Of course, We shouldn't use past performance as a guide for the future, now should we? ( tic) ..;) Obama will be another Jimmy Carter, in regards to giving us 10-15% Treasuries eventually.. Hold your $ in ST Bonds and wait for them.. and another Reagan Pres. will come along and ruin it for us...(tic)
Posted by: fundcollector at 12/04/2009 01:13:11 AM
Why does Kiplinger recommend Pimco (PCRDX) and not Harbor Commodity Real Return Strategy (HACMX) which is a clone with a lower fee?
Posted by: Limoman's wrong at 12/04/2009 04:08:55 PM
Limoman - why don't you compare apples to apples - VIPSX is TIPS fund, PCRDX is commodities fund with TIPS as collateral - so a majority of the time Commodities (not TIPS) will move the PCRDX fund's performance. comparing the two might be like comparing a domestic large cap fund's performance to an international fund's performance - they're both stock funds, but there are a lot of differences beyond that....