What’s the fund?
This month we are taking a closer look at the PIMCO Global Bond Fund. The fund is a traditional, long-only bond fund meaning the managers buy and hold the individual investments. There are no short positions and the funds positions are actively managed. The underlying investments are generally limited to investment grade bonds issued by Government, Semi-Government institutions, corporates and mortgage securities.
PIMCO is renowned as one of the world’s premier fixed income managers. PIMCO or Pacific Investment Management Company was founded in 1971 in Newport Beach, California and has grown to invest $1.84 trillion on behalf of individuals and institutions across the world. PIMCO employs over 2,700 investment professionals across 17 offices spanning the globe.
PIMCO are widely known for creating the ‘absolute return’ approach to fixed income investing, as opposed to simply letting markets be markets. The firm’s investment approach is very much driven by Macroeconomic views. These are constructed, collated and challenged through an intensive investment committee and review process. It involves regular Cyclical Forums, which seek to anticipate 6 to 12 month market trends, as well as the annual Secular Forum which projects trends over the coming 3 to 5 years. The firm then relies on individual experts to provide bottom up perspectives on individual securities, companies and sectors.
The fund is managed by the highly experienced Andrew Balls, who is the Chief Investment Officer for Global Fixed Income. He is based out of London, has been with PIMCO for 13 years and previously worked as a correspondent for The Financial Times newspaper.
The Australian fund has been running since April 2004 and has over $6.4bn in assets under management. The fund is benchmarked against the Bloomberg Barclay’s Global Aggregate Bond index. In addition to the core Global Bond Fund, PIMCO have recently launched an ESG or Environmental Social Governance overlay which seeks to ensure its investments have a positive impact on the world.
Where does it fit in your portfolio?
The Global Bond fund is a diverse, actively managed portfolio of global fixed income securities. The fund’s benchmark is the Bloomberg Barclay’s Global Aggregate Index which seeks to measure the returns of a diversified pool of bond issues by companies around the globe. The fund meets the requirements of the Capital Stable Bucket, being to generate a return of CPI+3% per year and ensure that your investment will retain its value in difficult market conditions, as it invests primarily in investment grade bonds and actively manages the risk in the portfolio. The underlying assets include bonds and similar fixed income securities issued by developed and emerging market Government’s, Semi-Government institutions, Corporates and high yield issuers. Management have experience investing over four decades and various major events from the Global Financial Crisis, to the Asian Crisis and various global conflicts.
With term deposit rates now falling well below 2%, but the risks to sharemarkets seemingly growing by the day, what you do with your Capital Stable allocation will have a larger effect on your returns.
The PIMCO Fund offers a core global bond exposure, diversified across emerging and development markets, corporates and governments. The nature of the underlying fixed income investments mean the fund will provide a hedge against equity market volatility and benefit from increasing demand for lower risk assets or a further compression in bond yields.
In recent months, experts suggest that this may be a time to be reducing exposure to bond markets. Yet, this oversimplifies the operation of bond markets and the all-important yield curve. The benefit of PIMCO’s strategy is that it is benchmark unaware and they are able to take active positions based on their long-term expectations for individual economies, markets and companies. This affords the managers flexibility to reduce the duration of their portfolio, currently around 7 years, and target specific periods on the yield curve where they believe opportunities are presenting. Duration is a measure of a bond’s sensitivity to movements in interest rates, as opposed to term to maturity which is the average term of each bond within the portfolio. Both are measured in terms of years, with a higher duration meaning any changes in interest rates will have a greater effect on the value of the portfolio.
PIMCO’s flexible mandate means they can be exposed to the potential for rate increases or decreases in various periods in the future. One such opportunity, is the threat of a slowing US or global economy in the next 3 to 5 years, which is likely to trigger a strong period for bonds. The fund currently holds its largest overweight position in bonds of this maturity, meaning investors stand to benefit if their assessment is correct. The fund also applies a number of ESG screens across the portfolio excluding companies involved in weaponry, pornography and tobacco and embracing those committed to improving environmental and social practices.
What does it invest in?
The PIMCO fund is wary of its benchmark index, but is not required to replicate it. The managers charge a management fee of 0.69%, and are paid to make major investment and allocation decisions on your behalf. The benchmark holds over 24,000 individual holdings by 4,500 issuers based all over the world. The managers seek to identify the best risk-reward opportunities from this universe whilst maintaining a core fixed income exposure through Government bond holdings. Some of the important details on the underlying portfolio include:
- Credit ratings: 91% of all investments are held in investment grade debt rated above BBB. The average rating is A+.
- Duration: The portfolio is predominantly weighted to Developed Government Debt, where 3.9 years of the 7.4 total duration are sourced and with a focus on the US, 3.3 years duration. More broadly the portfolio is allocated as follows:
- Yield curve: The yield curve explains the relationship between the term to maturity and return offered for various bonds, with the general expectation that the longer the term, the larger the yield or return. The fund is currently diversified as shown below. As you can see, the largest weightings are to longer term bonds, specifically those with 5 to 7 and 10 plus years to maturity.
The most important and comparable details for the underlying portfolio are as follows:
- Fund duration – 7.41 years – reflecting a high level of exposure to interest rate movements and the expectation that further rate cuts or increases will have a substantial impact on the value of the portfolio. This is broadly in line with the benchmark duration of 7.19 years.
- Yield to Maturity – 1.88% – reflecting the income that would be received by investors if the underlying bond portfolio was held to maturity. Whilst low in historical terms, this compares favorably to the many negatively yielding Government bonds around the world.
- Average coupon – 2.64% – reflecting the interest paid by the underlying bonds.
- Average maturity – 11.04 years – reflecting the average maturity of all bonds within the portfolio based on their size.
How has it performed?
The fund has performed incredibly well in the short-term, benefitting from continued moves by global central banks to 0% rates around the world. The 12 months to 31 August saw the fund deliver a return of 8.6%, albeit a little below the 10.0% delivered by the benchmark over the same period. The funds underperformance was due primarily to their focus on higher quality, investment grade bonds rather than the broader investments that form part of the benchmark.
Longer term returns have also been strong, 4.29% compared to 3.87% over the last three years and 7.79% per annum over the last 10 years. Obviously, the returns in the future will be determined by movements in interest rates and bond markets but with a worsening global outlook, inflated valuations in equity markets the fund is well positioned to benefit from a period of volatility. Most importantly, it shows little correlation to equity markets.
What income does it provide?
As with all managed funds, the PIMCO Fund must distribute all income and realised capital gains each year. Therefore, distributions are dependent on both the performance of the underlying investments and whether any investments are actually sold or mature. As an actively managed strategy, the fund regularly turns over their underlying holdings and also receives distributions from most investments on a quarterly basis. The result is a long history of quarterly returns with averages as follows:
- 3% for 12 months;
- 9% for 3 years;
- 1% for 5 years;
- 4% for 10 years.