Why Pimco Income Fund Remains a Good Investment

Pimco Income PIMIX deftly synthesizes the firm's nearly unrivaled resources to create a package that earns a ‎Morningstar Analyst Rating of Gold for its institutional share class and a mix of Silver, Bronze, and Neutral for its costlier shares.‎ Pimco veterans Dan Ivascyn, Alfred Murata, and Joshua Anderson have leveraged the firm's robust ‎mix of macro research and bottom-up analysis to focus on generating consistent payouts in addition to ‎performance. The latter has been roughly average over the past few years, but the strategy has avoided the ‎worst of the market's biggest problems. It endured some pain in early 2022, having carried a 2%-3% combination of bond and currency exposures to Russia going into the year. Still, the strategy fared ‎better than many multisector bond Morningstar Category peers in the face of rising global bond yields ‎by entering the year with a 1.15-year duration, much of it coming from a 5.5% exposure to inflation-‎indexed bonds. The strategy's 6.7% loss for the year to date through April 2022 on its institutional shares ‎beat the median return of its distinct category peers by roughly 40 basis points and was well ahead of ‎broad market benchmarks such as the Morningstar Core Bond Index, which fell 9.5%. ‎ Although not a major factor in 2022 thus far, the strategy has historically leaned a great deal on debt ‎backed by residential mortgages. Notwithstanding the impact of a rough early 2020 when the ‎coronavirus selloff sapped liquidity, the strategy's nonagency residential mortgage stake has made ‎positive contributions in every other calendar year since the beginning of 2012. Market supply of ‎legacy nonagency mortgage securities issued before the global financial crisis has shrunk, but Pimco ‎still likes the sector overall. In the past, we've raised concerns about the team's approach given its ‎reliance on nonagency residential mortgage-backed securities and the strategy's strong growth. It has stabilized at roughly $220 billion ‎across vehicles, though, alleviating some concerns. While the sector's exposure is down from a recent ‎high of 41% at the end of 2018, the strategy's 31% stake at the end of March 2022 was still roughly the ‎same size as five years ago. ‎ In part, that's thanks to a combination of market clout and the breadth of Pimco's asset base: The firm ‎has managed to acquire massive chunks of nonagency mortgage debt—including reperforming loans ‎sold off by government agencies—even as the legacy securitized market has shrunk. The allocations in ‎this portfolio mainly comprise a mix of legacy and reperforming loans; the team has avoided newer, ‎untested subsectors and subordinated tranches.‎ It's not clear whether attractive newer nonagency supply will remain as plentiful down the road. ‎Pimco remains confident, however, that the strategy can perform well with or without big ‎contributions from the sector given the rest of the large, global opportunity set available to this ‎multisector offering. Nonagencies have been a cornerstone of this strategy's success and stability, ‎though, so investors may have to temper expectations if the sector eventually becomes less ‎accessible.‎

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Morningstar Analyst Rating: Gold Process Pillar: Above Average People Pillar: High Parent Pillar: Above Average

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