A classic reputation

From Fund Selection 02 February 2003

By PWM Editor

High on stability but low on flash: Roxane McMeeken explains what makes Pimco’s flagship fund a star. The Pimco Total Return Fund has been a staple in the portfolios of two experts on our Funds Focus panel since PWM’s inception more than a year ago. It is not an outstanding performer, but it is a reliable, low risk one in terms of outperformance. Over the past 10 years the fund has returned 8.30 per cent annually, compared with 7.51 per cent returned by its benchmark, the Lehman Brothers Aggregate Bond Index. During the past six months it has dipped to 5.96, compared with the benchmark’s 6.23. But in the past three months it has bounced back to outperformance. Based in New Port Beach, California, Pimco is a fixed income specialist with $305bn under management worldwide for retail investors, high net worth families, governments, pension plans and endowments. The European insurance giant Allianz has a majority stake and uses the firm as its global bonds manager. Pimco’s flagship fund has a reputation as the classic American fixed income product, investing in US government and corporate bonds, mortgage and other asset-backed securities, US dollar and non-US dollar-denominated securities of non-US issuers and money market instruments. All investments are of intermediate maturity. Average duration ranges between three and six years and is normally expected to stay within one year of the duration of the index. The fund is run by chief investment officer Bill Gross, “the most influential authority on the bonds market in the US”, according to Pimco. He has 34 years of investment experience and numerous appearances on CNN under his belt. Investment process Mr Gross explains the investment process behind the Total Return Fund as “both top-down and bottom-up”. The top-down element is based on an annual summit, where Pimco’s investment staff draw up a three to five- year outlook on the global economy and interest rates. The outlook takes into account demographics, political factors and structural changes in the domestic and international economy deemed likely to affect interest rates. The outlook determines the basic parameters of the portfolio, including the duration and credit quality of its components. It also decides sector weightings and yield curve positioning – in other words allocation across various maturities. The bottom-up element comes into play during the process of selecting securities, according to Mr Gross. Pimco’s strategy is to identify and then analyse undervalued securities using proprietary tools, while scrutinising levels of quality published by ratings agencies. The credit quality of the portfolio’s components varies from A to Aaa.

Fund facts

Portfolio manager - Bill Gross
Net assets - $68.1bn
Inception - 11/05/87
Minimum investment - $5m, although investment advisers and fund supermarkets can purchase shares at a reduced minimum.

Fund statistics