| Fund Company | PIMCO Canada |
| Fund Type | Global Fixed Income |
| Rating | Not Rated |
| Style | Blend |
| Risk Level | Low – Medium |
| Load Status | Optional |
| Manager | Alfred Murata since January 20, 2011 |
| MER | 1.39% |
| Code | PMO 005 – Front End Units PMO 105 – Low Load Units |
| Minimum Investment | $1,000 |
Analysis: When it comes to fixed income investing, PIMCO is easily the most recognizable company in the space, and is arguably one of the best. Still, they are relatively new in the Canadian mutual fund industry, launching a small fund family in early 2011.
This fund is one of their global bond offerings, and is probably their best. It is a very actively managed and invests in non-Canadian dollar denominated fixed income investments. It is managed using PIMCO’s proven investment philosophy and process that uses a mix of top down and bottom up analysis to build the portfolio. The top down macro view is used to set the funds duration, yield curve positioning and sector exposure, while the bottom up research looks to identify the most attractive non Canadian securities that meet the funds broader asset mix.
They are extremely active in their approach with portfolio turnover of 580% in 2011 and 310% in 2012. To put that in perspective, they turned the portfolio over three times in 2012. Typically, portfolio levels of more than 100% are considered high.
Despite this, or perhaps because of this high level of portfolio turnover, the fund has come out of the gate quite strong, gaining 18% in 2011 and 24% in 2012. As impressive as these numbers are, there is no way that these returns are sustainable, particularly in an environment where the bias for interest rates is to the upside.
With interest rates on the rise, it is no surprise that the shorter term return numbers are considerably more modest. On a year to date basis, it has gained 3.4%, outperforming both its benchmark and peer group. For the three months ending July 31, it lost 1.9%. In absolute terms this performance is disappointing, but on a relative basis it is pretty strong, outpacing the Barclays U.S. Aggregate Index (CAD Hedged) by more than 1.1%.
Realizing that there was likely to be upward pressure on interest rates, they took some risk off the table earlier in the year. In the current environment, they are not focusing on interest rate strategies, but are instead looking to identify high quality, income generating assets that are likely to outperform in a rising rate environments.
To that end, the portfolio is fairly conservatively positioned holding 39% in government bonds, 35% in mortgages, 13% in high yield, and 8% in emerging market debt. The duration, which is a measure of its sensitivity to interest rates was 4.4 years, which was well below the duration of the benchmark of 5.5 years.
They have recently been focusing outside of the U.S., primarily Australia, where the pressure on yields is lower. They will continue to invest in countries that have what they believe to be strong balance sheets, specifically the U.S., Canada and Australia.
As you would expect with Monthly Income in the name of the fund, it provides regular cash flow to investors. It pays a monthly distribution that has ranged between $0.04 and $0.05 per unit. At current prices, that works out an annualized yield of approximately 2.5%.
I like this fund for a number of reasons. First, it has a very strong management team in place. PIMCO is one of the global leaders in the fixed income realm, and I see no reason that should not continue. Secondly, the managers are following a disciplined, repeatable process. Finally, the cost is very reasonable, with an MER of 1.39%.
While the fund has held up relatively well, the current macro environment is more risky than we have seen for some time. Because of this, I expect that this fund, and other fixed income focused funds have the potential to experience higher levels of volatility in the near to medium term.
Still, this fund should continue to deliver better than average returns, but nowhere near the level of absolute returns it has posted since inception. Realistically, returns in the low to mid single digits are more reasonable. I also expect that we will see the level of volatility move higher.
On balance, this is a very strong global bond offering. When used in a portfolio, I believe it is best used as a compliment to a core of high quality Canadian bonds, rather than your entire fixed income exposure.