Sumit Desai: Silver-rated PIMCO Income (PONAX) is managed by Dan Ivacysn and Alfred Murata, winners of the 2013 Morningstar Fixed-Income Fund Manager of the Year award. Ivacsyn was also named PIMCO's group CIO following the departure of Bill Gross in September 2014.
The fund has seen incredible success since the 2008 financial crisis, in terms of both returns and flows. It's in the top percentile of the multisector-bond Morningstar Category during the trailing five-, three-, and one-year time periods through July 2015.
Much of this fund's success is from sizable positions in nonagency mortgages, which has made up about 45% of this fund's assets over the past few years. These securities were viewed as highly risky during the financial crisis and sold off significantly, allowing Ivacysn and Murata to scoop them up at bargain prices.
The managers of this fund balance its nonagency stake with non-U.S. developed debt, emerging-markets debt, and high-yield corporate debt. Given its composition, we would describe this fund's risk profile as somewhere between investment-grade and high-yield corporate bonds.
In other words, we think this fund makes a nice addition to a diversified fixed-income portfolio but should be considered more of a complementary holding rather than a core position. As its name suggests, this fund has been an attractive option for investors seeking stability of income.
The managers of this fund set a monthly dividend target and attempt to stick with that target for at least a year. As of late, that dividend has been around $0.05 per share per month. The fund has been able to meet its obligations without much stress, in part, due to conservative forecasting. It has met its monthly dividend target through income earned and realized capital gains, and has not had to return any capital to investors.
Investors should also be aware of some concerns. The fund has grown significantly over the past few years, while the market for nonagency mortgages has shrunk considerably during the same time. As the fund continues to grow, it may become more difficult to find similarly attractive opportunities that can move the needle on returns and income payments.
These concerns are heightened slightly because of the fund's monthly distribution commitment, which can sometimes cause managers to take on extra risk in order to meet its income goals. The fund may face some challenges as it continues to grow while the market for its main source of recent returns--nonagency mortgages--shrinks.
That said, we have a high level of confidence in the skill set of Ivacsyn and Murata, along with the broad team and resources at PIMCO, to properly navigate these challenges. Finally, we also like that investors can access this fund in an affordable manner, as all of its share classes earn a Morningstar Fee Level of Below Average or Low.