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PIMCO Tries to Get Ahead of the Next Credit Crisis

But its intriguing approach also carries risk.

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If you're concerned about potential storm clouds on the global debt horizon, then  PIMCO Global Advantage Strategy Bond (PSAIX) may be worth a look. This world-bond fund takes a novel, and in some ways defensive, approach to the global market. But it also takes on potential risks in trying to separate from the crowd.

Rather than using a capitalization-weighted bond index as a starting point for its country exposure, this global bond fund focuses on GDP weightings. PIMCO has created the Global Advantage Bond Index, or GLADI, and uses it as the benchmark for this portfolio. The fund's managers, Mohamed El-Erian and Ramin Toloui, then make incremental, active calls versus the GLADI in terms of duration (a measure of interest-rate sensitivity), credit, and currency exposures.

Why a New Index?
Focusing on GDP rather than capitalization weightings helps avoid the trap of investing increasing amounts in a country's bonds as its indebtedness--and thus its benchmark weighting--grows. In the GLADI, a country's weighting rises as its income (that is, GDP) grows. This should lead the fund to buy more bonds in countries that have a growing capacity to repay their debts.

Kevin McDevitt does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.