Fund Times: PIMCO Loses Corporate Bond Manager

In the high-yield bond category's second high-profile manager departure in as many weeks, PIMCO lost one of its veterans to retirement this week.

On April 11,  PIMCO High Yield's (PHDAX) Ray Kennedy stepped down as the fund's sole manager and will soon retire to pursue other opportunities. The firm replaced Kennedy with Mark T. Hudoff, manager of the recently launched PIMCO Income Fund. Hudoff brings 20 years of experience to this fund, including 11 at PIMCO, and oversees the company's European High Yield and Global High Yield products.

Under Kennedy, the fund's five-year annualized return through April 11, 2007, only met its high-yield bond category average, but he achieved those results while better protecting shareholders from credit risk than the fund's typical competitor did. For example, the fund recently held about 91% of assets in B or BB bonds, the highest rated 'junk-bond' tiers, while its average rival held 79% of assets in such securities. That conservative look held the fund back in recent years, as the market rewarded investors who took on more credit risk. Low-quality junk bonds have rallied for several straight years, creating an uphill battle for conservative portfolios such as this one.

We'd be surprised if Hudoff changes this fund's conservative tack. In mid-2005, he noted to Morningstar his concern about rich valuations in the high-yield asset class. Thus, today the fund remains strongly positioned for an economic slow-down.

Last week, we covered the departure of manager Margie Patel from Pioneer High Yield (TAHYX).

Berkshire's Railroad Bet Helps Marsico Capital
Several Marsico-advised funds received some good news Monday after Warren Buffett's  Berkshire Hathaway (BRK.B) announced it is the largest shareholder of railroad  Burlington Northern Santa Fe . On Monday, April 9, the stock jumped about 6% as investors piled in after Berkshire's announcement.

Many of the nation's biggest advisors, such as Fidelity Investments and Capital Research & Management (advisor to American Funds) own Burlington Northern. But Marsico funds own more meaningful positions in the railroad--they're larger, as a percent of total assets--than those of nearly all large-growth competitors. For example,  Marsico Focus (MFOCX),  Marsico Growth (MGRIX), and several funds that the firm subadvises under other names all keep at least 3% of assets in the company.

The Marsico team notes several reasons for this bet, which it began making in 2005 and has held ever since. Although the railroad business probably isn't the most prominent growth industry in many investors' minds, this team looked closely at Burlington Northern after its research of coal and agriculture companies showed increasing railroad volume in coming years. They also appreciated the pricing power that Burlington Northern and  Union Pacific (UNP) enjoy in a virtual duopoly over parts of the country; not to mention, the company's planned service improvements to boost capacity.

After a Very Bumpy Ride, RS Fund Gets New Manager
Effective May 1, 2007, Jim Callinan will replace John Seabern as lead manager of  RS Diversified Growth (RSDGX). Accompanying Callinan will be a team of four newer comanagers, who have previously worked as part of his analyst team. Seabern posted respectable results at Diversified Growth versus small-growth rivals--the fund's annualized 10-year return of 12% fell in the category's better half. But much of that return, however, was front-loaded during 1999 when the fund gained 150%. It suffered a dramatic decline soon thereafter, and Seabern has struggled to moderate volatility or post consistent returns since.

For investors seeking a smoother ride, Callinan and his team may not be the answer. Their record at  RS Emerging Growth (RSEGX), which they will continue to manage (and which Callinan led as a solo effort from 1996 to 2006) is equally colorful. The fund gained more than 175% in 1999, but in eight calendar years since then, it has posted above-average small-growth category finishes only twice. And a notable change here will be Diversified Growth's new, more-concentrated look: It previously held about 90 stocks, but now it will hold between 40 and 60 companies. So, its short-term volatility may even increase as the fund assumes more stock-specific risk.

Vanguard's Bond ETFs Now Available
Vanguard launched its first four fixed-income ETFs on April 10. Vanguard Total Bond (BND), Vanguard Short-Term Bond (BSV), Vanguard Intermediate-Term Bond (BIV), and Vanguard Long-Term Bond (BLV) all hit the exchanges Tuesday for the first time, with each trading as a new share class of its respective traditional mutual fund counterpart. Although investors will pay commissions to buy or sell these ETFs, Vanguard charges a rock-bottom 0.11%--a solid deal for long-term investors.