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Objective research, analysis, and insight on investment funds in Canada from an acknowledged industry expert  

By Dave Paterson  | Wednesday, April 23, 2014

Fund company: PIMCO Canada
Fund type: Global Fixed Income
Fundata FundGrade® Rating: A; FundGrade A+ 2013 Award
Style: Blend
Risk level: Low-Medium
Load status: Optional
Manager: Alfred Murata since January 20, 2011
MER: 1.39%
Code: PMO005 (front end load); PMO105 (low load)
Minimum investment: $1,000

See the Fundata Fund Snapshot for more details.

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.

The PIMCO Monthly Income Fund is one of their global bond offerings, and is probably their best. It is a very actively managed fund 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 fund’s duration, yield curve positioning, and sector exposure, while the bottom-up research looks to identify the most attractive non-Canadian securities that meet the fund’s broader asset mix.

The management team led by Alfred Murata is extremely active in their approach, with portfolio turnover of 580% in 2011 and 310% in 2012. Typically, portfolio turnover levels of more than 100% are considered high.

Strong outperformance

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. Even 2013, which was a tough year for bond funds, saw the fund gain 6.4%, beating its benchmark and peer group. As a result, the fund was awarded the Fundata FundGrade A+ Award for 2013, and maintained a monthly A-grade in March. However, given the current outlook for rates, I do not believe the returns are sustainable.

To that end, the portfolio is fairly conservatively positioned, holding 35% in government bonds, 31% in mortgages, 13% in high yield, and 16% in emerging market debt. The duration, which is a measure of the portfolio’s sensitivity to interest rates, was 4.6 years, which was well below the duration of the benchmark of 5.5 years.

The managers 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 its name, the fund 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.

Bottom line

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 complement to a core of high-quality Canadian bonds, rather than your entire fixed-income exposure.

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson's Top Funds Report and Mutual Fund and ETF Update, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2014 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.

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