Pimco Income PIMIX deftly synthesizes the firm's nearly unrivaled resources to create a package that earns a Morningstar Analyst Rating of Gold for its institutional share class and a mix of Silver, Bronze, and Neutral for its costlier shares. Pimco veterans Dan Ivascyn, Alfred Murata, and Joshua Anderson have leveraged the firm's robust mix of macro research and bottom-up analysis to focus on generating consistent payouts in addition to performance. The latter has been roughly average over the past few years, but the strategy has avoided the worst of the market's biggest problems. It endured some pain in early 2022, having carried a 2%-3% combination of bond and currency exposures to Russia going into the year. Still, the strategy fared better than many multisector bond Morningstar Category peers in the face of rising global bond yields by entering the year with a 1.15-year duration, much of it coming from a 5.5% exposure to inflation-indexed bonds. The strategy's 6.7% loss for the year to date through April 2022 on its institutional shares beat the median return of its distinct category peers by roughly 40 basis points and was well ahead of broad market benchmarks such as the Morningstar Core Bond Index, which fell 9.5%. Although not a major factor in 2022 thus far, the strategy has historically leaned a great deal on debt backed by residential mortgages. Notwithstanding the impact of a rough early 2020 when the coronavirus selloff sapped liquidity, the strategy's nonagency residential mortgage stake has made positive contributions in every other calendar year since the beginning of 2012. Market supply of legacy nonagency mortgage securities issued before the global financial crisis has shrunk, but Pimco still likes the sector overall. In the past, we've raised concerns about the team's approach given its reliance on nonagency residential mortgage-backed securities and the strategy's strong growth. It has stabilized at roughly $220 billion across vehicles, though, alleviating some concerns. While the sector's exposure is down from a recent high of 41% at the end of 2018, the strategy's 31% stake at the end of March 2022 was still roughly the same size as five years ago. In part, that's thanks to a combination of market clout and the breadth of Pimco's asset base: The firm has managed to acquire massive chunks of nonagency mortgage debt—including reperforming loans sold off by government agencies—even as the legacy securitized market has shrunk. The allocations in this portfolio mainly comprise a mix of legacy and reperforming loans; the team has avoided newer, untested subsectors and subordinated tranches. It's not clear whether attractive newer nonagency supply will remain as plentiful down the road. Pimco remains confident, however, that the strategy can perform well with or without big contributions from the sector given the rest of the large, global opportunity set available to this multisector offering. Nonagencies have been a cornerstone of this strategy's success and stability, though, so investors may have to temper expectations if the sector eventually becomes less accessible.
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Morningstar Analyst Rating: Gold Process Pillar: Above Average People Pillar: High Parent Pillar: Above Average
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