Despite the Bill Gross’ sudden departure from PIMCO, the exchange traded fund version of the company’s flagship Total Return Fund is monitored by a seasoned group of managers and could still offer decent risk-adjusted returns.
Bill Gross and Mohamed El-Erian have exited PIMCO’s Investment Committee, the body that determines the broad risk exposure of the company’s fixed-income strategies, but Dan Ivascyn, the new group chief investment officer, along with Mark Kiesel, Mihir Worah and Scott Mather, will maintain the firm’s committee-driven investment process, writes Morningstar strategist Samuel Lee. [BOND Bleeds, but Other PIMCO ETF See Modest Inflows]
While the PIMCO Total Return Institutional Share (PTTRX) has been downgraded to a bronze rating by Morningstar, Lee argues that the fund will continue to outperform its category peers on a risk-adjusted basis over a full market cycle.
“Morningstar also maintains a positive view on the quality of the fund’s new portfolio managers and its existing investing process, which is unlikely to change significantly,” Lee said.
The average retail investor can gain exposure to PIMCO’s Total Return Fund through its ETF adaptation, the PIMCO Total Return ETF (NYSEArca: BOND).
“BOND remains a fine core bond fund,” Lee added.
BOND uses a similar investment style as the institutional share class PTTRX, following PIMCO’s macroeconomic views on security exposure and allocating many of the same active bets. The ETF version has outperformed the mutual fund over the past year, but BOND has recently began to fall behind PTTRX – the ETF is up 0.1% while PTTRX is up 0.2% over the past month. PIMCO, though, believes the ETF will more closely reflect the mutual fund in the future.
Since its inception, the Total Return fund has been able to outperform its bencmark by a little over 1% annually. Former manager Gross attributed the excess returns to short-duration credit risk, intermediate maturity bond exposure and “rolling down the yield curve” to earn extra capital gains, and selling volatility through option sales.
The Total Return fund has been increasing its credit sector allocations as a result of the company’s “New Neutral” secular forecast where bonds and stocks look fairly priced. BOND includes 29% U.S. government bonds, 12% mortgage bonds, 31% US credit, 4% emerging markets and 24% cash equivalents.
BOND has a 0.55% expense ratio, 2.1% 30-day SEC yield and a 5.05 year duration.
For more information on the fixed-income space, visit our bond ETFs category.
Max Chen contributed to this article.