Skip to Content
Fund Times

Fund Times: IRS Ruling a Big Headache for PIMCO Fund

Plus, new fee agreement for Vanguard fund, two new Alger funds, and more.

Mentioned: , ,

Tax Ruling Could Hamstring PIMCO Fund
PIMCO revealed on Monday that the IRS has issued a ruling that could force big changes in the way PIMCO runs the hugely popular  PIMCO Commodity Real Return Strategy (PCRDX). The IRS said that income from commodity-linked swaps would not be considered qualified income in its test for whether a fund can receive favorable tax treatment as an investment company.

Essentially, the ruling means PIMCO will have to scale back its use of commodity-linked swaps in its mutual funds, unless it is able to get the ruling reversed. The IRS said the rule won't take effect until June 30, 2006, so that commodity mutual funds will have time to make needed changes to their portfolios. At this point, it isn't clear if any other commodity funds will be affected.

PIMCO uses the swaps in order to get exposure to commodities and Treasury Inflation-Protected Securities. Switching to structured notes instead of swaps could reduce the fund's exposure to TIPS.

In an amended filing, PIMCO stated that "the revenue ruling has no immediate impact on the current operations of the fund and will not affect the ability of the fund to qualify as a regulated investment company for tax purposes for periods through June 30, 2006.

"PIMCO will explore a range of possible legislative, regulatory and investment alternatives that may possibly enable the Fund to continue to qualify as a regulated investment company after June 30, 2006, using its current investment techniques. At this point, it is not known what alternatives, if any, may be available to ensure continued qualification after June 30, 2006. If the fund is unable to ensure continued qualification using its current investment techniques, the fund may be required to change its investment objective, policies or techniques, or cease operations."

Vanguard Mum on New Breakpoints for Vanguard Windsor II
Vanguard said in SEC filings Monday that it had renegotiated fee schedules with  Vanguard Windsor II (VWNFX) subadvisors Barrow, Hanley, Mewhinney & Strauss, Inc., and Equinox Capital Management, LLC--effective Dec. 19, 2005.

Oddly, though, Vanguard didn't disclose what the new breakpoints are in those management contracts. The new breakpoints don't appear to have changed the current expense ratio, but presumably it will limit the amount by which expenses would drop if assets were to grow.

Sentinel Brings International Fund In-House
Sentinel said it has fired INVESCO Global as subadvisor for  Sentinel International Equity  (SWRLX) and replaced it with Katherine Schapiro, who recently joined Sentinel. Schapiro was a manager at Strong from 2001 to 2004.

Alger Launches Two Funds
Fred Alger Management Inc. plans to launch a technology fund and a core fixed-income fund, according to a Dow Jones newswire. Fred M. Alger III is the chief market strategist for the funds and will oversee their investments, it said.

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.