An Upgrade for This PIMCO Fund
It's only a matter of time before Silver-rated PIMCO Low Duration's advantages make more of a mark.
The following is our latest Fund Analyst Report for PIMCO Low Duration Fund PTLDX. Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.
PIMCO Low Duration's flexible approach requires expertise across sectors and strategies; managers Scott Mather, Jerome Schneider, and the broader PIMCO complex have enough to spare. Given continued stability and focus among the firm's senior leadership and key individuals supporting the effort here since Bill Gross' departure, we've upgraded PIMCO's Parent Pillar rating to Positive from Neutral, and its Morningstar Analyst Rating to Silver from Bronze.
As in the past, the firm's macroeconomic views shape the fund's strategy. For example, PIMCO is still concerned that the short end of the U.S. Treasury yield curve isn't fully pricing in the impact of future rate hikes. As a result, the team has kept the fund's duration short of its benchmark's by less than half a year lately. The team has also turned to agency mortgages as a higher-quality, better-yielding substitute for two-year Treasuries (between 26% and 39% of assets since June 2016).
While those same preferences are reflected in
Although the fund hasn't yet distinguished itself under this team's direction—its 1.2% annualized return for the 2.5 years through March 2017 lands just shy of its typical peer's 1.3% (distinct funds)—the team is making full use of the resources and flexibility at its disposal. The fund's relatively short duration and caution toward credit risk have been a drag at times during this stretch, but the team has effectively employed other tools in its arsenal, such as modest currency bets and hedging strategies, to make up ground. It's only a matter of time before this fund's advantages make more of a mark.
Process Pillar: Positive | Miriam Sjoblom, CFA 04/17/2017 This fund's robust, well-supported process looks similar to the one in place at flagship PIMCO Total Return but with a focus on the short end of the yield curve, earning a Positive Process Pillar rating. The fund invests in traditional core sectors—government debt, mortgages, and investment-grade corporates—but also takes modest positions in high-yield, developed- and emerging-markets debt, and currencies (the fund's benchmark is the narrowly focused Bank of America Merrill Lynch 1-3 Year Treasury Index). The managers start with the firm's macroeconomic forecasting (determined by PIMCO's Investment Committee) and bottom-up analysis to determine interest-rate, yield-curve, currency, country, sector, and security-level decisions. Themes prominent in PIMCO Total Return's portfolio tend to surface here, too.
That said, the constraints of the fund's short-duration mandate can cause its portfolio to diverge. For example, PIMCO's bearish view toward short-term Treasuries of late has prompted the managers to hold larger stakes in higher-yielding short-duration corporate and emerging-markets instruments here instead. Still, the fund's higher-risk positions, such as currency bets, are generally sized smaller to keep volatility in check, and the team, backed by an industry-leading risk-management apparatus, has historically managed these risks capably.
A central theme in the portfolio remains PIMCO's concern about volatility on the short end of the U.S. yield curve as the Fed embarks on a series of target rate increases. That's reflected in the fund's 1.6-year duration as of Feb. 28, 2017, which is less than half a year shorter than its benchmark's. And in place of owning two-year Treasuries, the team increased the fund's exposure to similar-duration agency mortgage-backed securities starting in mid-2016. That position peaked at 39% in September 2016, more than doubling its size since the start of the year, but the team trimmed it closer to 26% lately. Although the firm is cautious on corporate credit risk at present, the fund holds a sizable helping of short-duration investment-grade corporates, some with floating rates, both as a substitute for nominal Treasuries (30%) and for cash (10%). Volatility in the financials and energy sectors gave the team an opportunity to increase the fund's holdings in those areas in 2016, bets it has since trimmed.
Other positions reflect PIMCO's recent wariness. The fund has maintained a long dollar position so far in 2017 (106%), more recently against shorts in pro-cyclical Asian currencies such as the Taiwan dollar and Korean won as a hedge against risk. A newly implemented relative value trade—long German rates versus short French rates—also serves as a hedge against political risk in Europe.
Performance Pillar: Neutral | Miriam Sjoblom, CFA 04/17/2017 Since taking over roughly 2.5 years ago, the new team's decisions are having an impact, even if the fund hasn't yet distinguished itself from the herd. From Oct. 1, 2014, through March 31, 2016, the fund's 1.2% annualized gain lands shy of the Morningstar Category norm (distinct funds). The team's decision to shorten the fund's duration early on proved costly initially, while a comparatively cautious stance toward credit risk kept the fund in middling territory in 2016.
The fund has more tools at its disposal than many straight-laced rivals, however, and the team has used those to make up lost ground versus peers. In 2015, for instance, the fund's long U.S. dollar bet against shorts in the euro and Japanese yen did some heavy lifting, as did a small position in nonagency mortgage bonds. Currency bets played a lesser role in 2016, while nonagency mortgages remained a steady contributor. In addition, timely adjustments to the fund's corporate exposure, including increases in its financials and energy stakes when those sectors got cheap, as well as a preference for floating-rate debt ahead of the Fed's December rate hike, helped the fund keep pace with its typical peer that year.
The current team continues to make full use of PIMCO's expansive capabilities across sectors and strategies, but given the still-short track record for Mather and Schneider here, the fund earns a Neutral Performance Pillar rating.
: Positive | Miriam Sjoblom, CFA 04/17/2017
The skilled, well-resourced team overseeing this fund has remained stable following Bill Gross' departure in September 2014; it earns a Positive People Pillar rating. Scott Mather and Jerome Schneider are well-respected managers who bring complementary skills to the table. Mather, who takes the lead on this portfolio, has served in a number of roles across PIMCO, including running its global portfolio management team where he built strong records at funds such as
Schneider joined PIMCO's short-term desk in 2008 and took over as the head of this effort and
Schneider and Mather are supported by PIMCO's vast army of portfolio managers and analysts. It's encouraging that aside from a couple of high-profile departures, the firm's senior investment ranks have been relatively stable, while several new and returning hires have bolstered the Investment Committee.
Parent Pillar: Positive | 04/04/2017 PIMCO has endured rocky waters, including the late-2014 departure of co-founder Bill Gross. Outflows soared at the firm thereafter but slowed in 2015 and 2016; the firm returned to net inflows in January 2017.
The firm continues to benefit from a standout investment culture. Dan Ivascyn has been successful as comanager of
We have historically taken the firm to task for failing to pass along economies of scale in pricing, but its overall expense profile is reasonable if not notably attractive. That said, PIMCO has never closed a fund to new investors. That is an issue of import given that assets managed in, and using the same strategy as, PIMCO Income grew to more than $100 billion of assets at the end of 2016. We've yet to see evidence drawing a direct line between asset size and performance, but we continue to evaluate the situation.
On balance, PIMCO has many more pluses than minuses and has earned a Positive Parent Pillar Rating.
Price Pillar: Positive | Miriam Sjoblom, CFA 04/17/2017 At 0.46%, the price tag for the fund's institutional share class, which houses the majority of the fund's assets, is competitive relative to the 50-basis-point median for similarly distributed funds in the short-term bond category, earning the fund a Positive Price Pillar rating.
However, other share classes are less attractively priced, including the fund's no-load shares (just 7% of assets). The 75-basis-point expense ratio on these shares is above average compared with other no-load share classes. With short-term rates still low, high costs keep a disproportionate share of fund returns out of investors' pockets.