A Bronze-Rated Fund That Charts Its Own Course Around the World

 PIMCO Global Advantage Strategy Bond (PSAIX) charts its own course. It uses country gross domestic product rankings as the foundation for its custom benchmark--the PIMCO Global Advantage Bond Index (GLADI)--rather than the traditional capitalization-based approach. As a result, compared with many of its peers, the fund tends to downplay indebted regions like the U.S., eurozone, and Japan while emphasizing countries that have higher incomes to help pay their debts, including many in the developing world. The custom benchmark's broad range of sectors and currencies provides an attractive level of diversification.

Managers Andrew Balls, Mohamed El-Erian, and Ramin Toloui channel PIMCO's broader macroeconomic views when taking active bets versus the benchmark. Dialing down risk has been a firmwide mantra this year, and the managers have reduced the fund's duration, credit, and currency risk. Those moves included underweighting its exposure to longer-dated maturities and reducing its emerging-markets stake. Despite such caution, this fund's midteens emerging-markets stake was a headwind as that sector was particularly hard-hit when bond markets sold off from May through July. As a result, the fund's 5% loss for that period was worse than 70% of its peers. The fund lagged in a similar fashion during the flight to quality of August and September 2011.

Over time, that positioning has been advantageous when risk-taking is rewarded, though, helping it retain an edge on the world-bond competition since its February 2009 inception. Because the fund's profile has caused it to perform in sync with riskier assets, it's a tough sell for investors seeking stability. But those who can handle the added volatility have an interesting option. The managers behind this fund have excellent resumes for the task at hand, and PIMCO has a proven record of avoiding trouble spots, including its anticipation of the U.S. housing bubble and the eurozone crisis. The managers rely on a well-coordinated, globe-spanning team of portfolio managers and analysts, which is another notch in this fund's favor. 

Process
PIMCO designed this fund's benchmark, the PIMCO Global Advantage Bond Index (GLADI), to avoid the shortcomings of traditional capitalization-weighted indexes, which emphasize countries with the heaviest debt burdens, increase exposure to bonds as they appreciate in price, and overlook faster-growing markets. The GLADI weights regions by gross domestic product rather than debt outstanding, which emphasizes issuers with better balance sheets and higher income levels, as well as countries where capital markets are in their early stages of development.

The GLADI provides roughly equal exposure to three areas within each region: sovereign interest rates and inflation-protected bonds, investment-grade corporate debt, and securitized assets (or currencies in emerging markets). Emerging-markets bonds and emerging-markets currencies take up roughly one third and one fifth of the index, respectively, as opposed to more widely followed global bond indexes, which are dominated by the U.S., the eurozone, and Japan. To illustrate, the Barclays Global Aggregate Bond Index devoted roughly 5% to emerging-markets issues in early 2013. The GLADI is administered and calculated independently from PIMCO by Markit, an unaffiliated global index provider. The fund's managers take active bets versus the GLADI by adjusting the portfolio's exposure within each region, and they use a mix of cash securities and derivatives to gain exposure.

Portfolio
A GDP-weighted approach has some drawbacks, including the added complexity involved in determining how much weight to assign to various issuers and instruments at a more granular level, and the lack of liquidity available in some developing markets. The managers channel PIMCO's broader macroeconomic views in order to sidestep those challenges. For instance, the team's concerns over Europe's debt crisis led it to minimize the fund's exposure to European corporate bonds in 2011. It opted instead to allocate most of those assets to German bunds, which rallied that year.

Since early 2013, the team has focused on reining in risk, another firmwide refrain, by dialing down the fund's duration, credit, and currency risk versus the GLADI. That saved the fund some pain since the bond market sell-off began in May, though its heavier emerging-markets exposure relative to most world-bond peers served as a headwind. (Its overall emerging-markets stake was 13% of the fund's duration as of June 30, down from 22% on March 31.) Similar to the views expressed in PIMCO's emerging-markets bond funds, the managers have also favored local rates in Brazil, Mexico, and South Africa, as well as quasi-sovereign credits in Brazil, Mexico, and Russia, while downplaying the debt and currencies of lower-quality countries, particularly those located in Eastern Europe. 

 

Performance
Despite management's caution when it comes to certain corners of the bond market, the portfolio's ample exposure to developing countries (typically one fourth to one third of assets) has given it a leg up when risk-taking is rewarded. That was the case during the first four months of 2013, when the fund's 1% gain was 77 basis points better than the world-bond category norm. Despite management's efforts to tone down duration and credit risk prior to the sell-off that began in May, the hefty emerging-markets stake dragged the fund down a bit farther than its typical peer from May through July. As a result, the fund's 3.7% loss over 2013's first seven months was at the median of the world-bond category, and roughly in line with the GLADI and the Barclays Global Aggregate Bond Index. The same performance patterns played out in the risk-seeking markets of 2009 and 2010, and when the bond markets sold off in August and September 2011.

That formula has given the fund an edge on the competition since its February 2009 inception. The fund's 6.9% annualized return through July 31 was 50 basis points ahead of the category median and 200 basis points better than the Barclays Global Aggregate Bond Index. Its results were on par with the custom benchmark's, however. The fund also has been about as volatile as the GLADI over the past three years, and a bit more volatile than the group norm.

People
El-Erian and Toloui have co-run this fund since its February 2009 inception; Balls joined them in October 2011. El-Erian has been PIMCO's CEO and co-CIO since he rejoined the firm in late 2007. Toloui joined the firm as a portfolio manager in 2006, and he became co-head of the emerging-markets debt team in early 2010. He relocated to the firm's Singapore office in early 2012 to oversee its expansion. Balls, who joined PIMCO in 2006, is located in London and leads the firm's European investment team. The trio is backed by PIMCO's vast global resources, which consist of more than 30 developed- and 15 emerging-markets managers in several locations worldwide. The team also has access to more than 40 credit analysts.

PIMCO isn't the only firm with a sprawling global investment staff, but the level of coordination and collaboration between offices and the consistency with which the team's views are expressed across portfolios are impressive. Whereas some world-bond managers viewed developed-markets debt markets as primarily rate-driven up until the eve of the eurozone debt crisis, PIMCO began analyzing the credit component of these highly indebted regions well in advance. The firm's three regional committees (Americas, Europe, and Asia) look across developed and emerging markets when generating ideas, while regional specialists are also responsible for feeding market-specific ideas to generalists.

Price
The fund's Institutional shares hold more than 90% of this fund's assets. This share class' 0.70% annual levy is 5 basis points cheaper than the median for world-bond funds sold through this channel. 

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