So, why are investors rushing into Pimco Income in such unprecedented numbers?
Arguably, recent investors have been attracted to Pimco Income by its stellar track record. Even after accounting for hedging costs (about 150 basis points), the fund has managed to provide unrivalled risk-adjusted returns. The majority of the portfolio is invested in investment-grade bonds, yet has returned 4% annualised over the last three years. For euro investors who hedge their foreign-currency exposure, that leaves a return of about 2.5%. This not much by historical standards, but it’s a lot more than your average European fixed income fund has returned over that period (see chart below).
But what explains this solid performance? Our sister publication Expert Investor found one of the earliest investors in Pimco Income, Bank Audi’s head of advisory Walid Moukarzel to help answer that question.
“We have been invested in Pimco Income since 2013 when the fund first opened in Europe,” he says. “Throughout the more than four years we have been invested in the fund they have navigated the interest rate risk very well, while at the same time finding areas with income without compromising the risk profile of the fund,” Moukarzel adds.
Mortgage opportunity
But there’s another important driver of recent performance. Unlike most of its competitor funds, Pimco Income has had a large allocation to (US) mortgages (now about a third of the portfolio).
“They have been fortunate to be a specialist in that,” says Moukarzel. Bart van de Ven, a private banker the Belgian wealth management boutique Accuro who was been invested in Pimco Income since 2015, agrees.
“The fund’s allocation to mortgage-backed securities has been their main driver of outperformance in recent years,” says Van de Ven.
But this windfall is unlikely to last forever, both fund selectors realise.
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