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By Christine Benz and Eric Jacobson | 09-30-2013 12:00 PM

PIMCO Income a Unique Player

This fund's preference for nonagency mortgages has set it up for success so far in 2013, says Morningstar's Eric Jacobson.

Christine Benz: The last fund we want to look at is PIMCO Income. In contrast to the preceding two funds, it's actually having a pretty good year so far this year. But before we get into the drivers of that, I'd like to talk a little bit about the complexion of this particular fund, what is it set out to do?

Eric Jacobson: What makes it unique within the PIMCO complex is that it's very income focused. It does have a secondary goal of total return, and that framework makes it look something like other funds out there in the marketplace, but within PIMCO, it's pretty unusual on the open-end side to be just income focused.

The way that they arrive at that goal is to look for the best income delivery and risk-adjusted returns across the marketplace. They view their palate as being very, very broad and perhaps to some degree broader than a lot of other funds and we call the multisector category. But even though they profess to have a lot of flexibility to switch among sectors, they tend to cluster around some that they historically have favored, whether it would be, for example, a third high-yield, a third foreign high-quality, maybe a third emerging-markets. That doesn't necessarily speak to all of them, but that's historically the way that a lot of them operate.

Here, the fund has been very opportunistic historically in the fact that it owns a lot of nonagency mortgages, which is relatively unusual not just in this category but really across the investment landscape, in part because PIMCO has a real tremendous research effort in the nonagency space, and that happens to be the specialty of the managers who run this fund as well. But they argue very, very strongly that it isn't a mortgage fund per se. It only has about half the portfolio in mortgages today. They look to diversify it as other opportunities have popped up and things have reached values that they're comfortable with in the nonagency mortgage space in particular. But it is an area that still offers a lot of opportunity. They intend to exploit that until which time it's not as positive a choice as it might otherwise be. But they're very, very demonstrative and, as I said, enthusiastic about other areas globally across the bond market.

One of the things that they try to do is focus on seniority across capital structures--which is also a little bit different than some of the other more flexible funds--in conjunction with paying attention to what they view as real tail risks in the marketplace, [the] possibility out there of big market shocks and so forth. So that does distinguish them a little bit. I think to some degree they take on a little less risk than some of the more aggressive multisector funds; but overall, this is a much more aggressive fund than PIMCO Total Return. People really need to understand that.

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