Q&A: PIMCO Monthly Income Fund

A reader wants to know: Why has the PIMCO Monthly Income Fund been doing so well and should it be bought now? Gordon Pape gives his answer.


Q – I am looking at the PIMCO Monthly Income Fund and am considering investing in it. Can you explain how it has done so well for a fund that is advertised to be low risk and would you recommend it? – Ken L.


A – There’s no question the fund has been impressive since it was launched in January 2011. It gained almost 16% over the year ending June 30 and was showing a two-year average annual compound rate of return of 15.1% at that point. But don’t be blinded by those numbers. As of the close of trading on July 26, the fund was only showing a 3.3% year-to-date advance. That’s still good, but nothing like last year’s pace.

It’s not hard to understand why the loss in momemtum. The fund invests in a portfolio of foreign bonds and mortgages, primarily denominated in other currencies. The bond market remained strong in 2011 and 2012 as yields declined in the face of a slow-growth global economy. This year we have seen commercial rates starting to inch higher, even though central banks continue to hold the line. Rising rates are bad news for fixed-income investments because as yields move higher, prices decline.

PIMCO, which is based in southern California, is one of the most respected fixed-income traders in the world. But even it cannot hold back the tide although through astute security selection, its managers can mitigate losses. One of the ways they achieve this is by shortening the average term of the securities in the portfolio; as of June 30, the fund’s duration was only 4.4 years. (Duration is a measure of a fund’s sensitivity to interest rates; the higher the duration the greater the risk. The DEX Universe Bond Index has a duration of about six, so this fund has below average rate sensitivity.)

The fund pays monthly distributions which have generally run between $0.04 and $0.05. Over the year to June 28, it paid out $0.6127 per unit, which works out to a trailing yield of 4.4% based on the July 26 net asset value of $13.99. The price over that period increased by $1.37 which is a very healthy sign.

This is a first-rate fund if you are looking for exposure to the international bond market, top-quality management, and a decent yield. My main concern is the negative effect of rising interest rates on the return. That said, the year-to-date return is comfortably positive and puts this fund among the best performers in its category so far in 2013. – G.P.


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