A Top Small-Cap Performer

Patricia Oey: PIMCO StocksPLUS Small takes an unusual approach to provide broad exposure to U.S. small caps. It is essentially a 2-for-1 fund: It seeks to track the Russell 2000 using futures and provide additional returns from an actively managed bond strategy. Since the Russell 2000 futures require only a small cash outlay, the fund is able to provide about a 100% exposure to the performance of both the Russell 2000 and the bond portfolio. PIMCO, with its vast bond-investing resources and derivatives-trading capabilities, is uniquely positioned to provide a fund such as this.

Capable management also provides reassurance. Mohsen Fahmi runs the flexible bond sleeve. He joined PIMCO and this fund in 2014 and has over 30 years of experience and serves on the firm’s investment committee. Fahmi’s bond portfolio broadly reflects the themes set by PIMCO’s investment committee, holding both long and short positions across a board investment universe, including global credit, rates, and currencies. He tries to tread lightly in areas that are more correlated with equities, such as high-yield credit, in an effort to minimize additional declines from the bond portfolio when equity markets are down.

Long-term performance has been top-quartile within the small-blend Morningstar Category. This is in part due to the fund’s ability to capitalize on a favorable dynamic in the Russell 2000 futures market. It can be difficult to short small caps, so investors often short the Russell 2000 Index as a proxy, resulting in a supply/demand imbalance that favors investors who take long positions in the Russell 2000, such as this fund. Over the past four years, this fund's index futures holdings contributed an average 50 basis points a year.