PIMCO Income Fund

Tim Wong  |   07/06/2017 Text size  Decrease  Increase   |  
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Tim Wong: PIMCO Income's strengths start with its people. It's managed by highly-qualified long-tenured staff. While the Australian vehicle has only been operating since 2015, group chief investment officer, Dan Ivascyn, has been in charge of the US version of this strategy since 2007 with Alfred Murata, his co-manager, since 2013.

Ivascyn has been highly successful making some astute big-picture calls. He has managed to do so without incurring excessive volatility while continuing to meet the fund's objectives of a regular and steady income distribution. Furthermore, Ivascyn and Murata are supported by a highly capable and deep credit research team, which is particularly helpful in a sector such as mortgages.

PIMCO Income has favoured a variety of credit sectors over time with occasionally meaningful exposure to government-related securities. This fund has historically invested heavily in mortgage-backed securities. Notably, its exposure to non-agency mortgages has often reached more than a quarter of the overall portfolio since 2010. Meanwhile, exposure to emerging markets debt and high-yield credit has grown significantly since 2012. Physical securities and derivatives such as interest rate and credit default swaps are also used in this portfolio.

This fund's rapid growth is an issue that we are monitoring but not one that we see as a meaningful hindrance. We believe that the main complication is this fund's ongoing ability to continue investing significantly into non-agency mortgages, a sector that has been shrinking since the 2008 financial crisis due to a lack of issuance as well as the natural amortizing characteristics of these types of instruments. PIMCO Income has benefited greatly from this call and continuing to sustain its exposure there even as the fund's assets have swelled.

That said, there is more to this fund than non-agency mortgages. Exposure to high-yield credit and emerging markets debt has grown over time, while this fund also has the ability to take currency positions as well as invest into other securitized debt in order to continue meeting its performance objectives.

PIMCO Income is best used as supplementary role in a broader portfolio given its potentially high sensitivity to credit markets.

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