A Further Conversation about Pimco GIS Income Fund’s Returns.

I wanted to add something to the two posts that I written about the Pimco GIS Income fund.

Previously, I shared some of the stuff that investors might be interested in these funds:

1. Why Your Income Fund Pays the 3-7% Income partly from Capital
2. Some Thoughts Regarding Mari Invest Income Solution and its Underlying Income Unit Trust.

Most who are interested in Pimco GIS Income may be due to their bankers recommending it. Maybe they are attracted to the rather high distribution yield of nearly 6%, a high yield to maturity of 7% and a very consistent income since 2013. Having a SGD hedged class of funds and monthly dividend distribution helps.

In my second article, I gone through that different share class of the fund has different fees and those fee sensitive investors may want to take note of that.

When you see a fund with a high distribution, a prudent investor would wonder if the payout is sustainable and they have shown that they are able to maintain the same monthly distribution per unit since 2013, before increasing the payout when interest rate started to rise in 2022.

For many investments, what drives returns is the underlying but on a deeper analysis, I can’t easily tell the difference in performance, with respect to the defacto index, the Bloomberg Global Aggregate Bond Index (which you can invest via AGGU at IBKR, or Amundi Index Global Aggregate Bond A12HS (C) SGD at Endowus or Poems).

The GIS Income hold a fair bit more of Mortgage Back Securities compare to the Global Aggregate Bond Index, but I don’t think that drives the performance.

My hunch is that:

1. This is an active fund and they actively reduce the amount of short-term fixed income allocation.
2. They are selective about the fixed income instruments within the maturity, and the yield curves they preferred.
3. They earn options premiums which adds to the result.

Returns of Pimco GIS Income Institutional Class vs Bloomberg Global Aggregate Bond Index

The table below shows some of the fund’s metrics and the returns when we put them side by side with the Global Agg Index:

The yield is higher, shorter in maturity and shorter in duration. Since the short end of most yield curves around the world have high returns, their yield will look much better. This is an actively-managed fund compared to an index that is to keep the duration of the fixed income portfolio constant. So you will expect the yield, maturity, duration profile to change from time to time.

The remarkable thing is they are able to have a good performance versus the benchmark index. You can say that they move their positions and they would take some losses if they hold the portfolio of fixed income that are less suited for certain environments and that losses would be in the result above. The calendar year returns includes the coupon payments, and considers the distribution income.

10-11 years is a good timeframe for us to reflect upon the results of an actively managed fixed income fund. While some may have the impression that fixed income is easier to manage, we tend to see returns to be worse than the benchmark index or at most similar. You can really do enough stupid things to cock up the returns. So this result is pretty good if you ask me.

One thing to note is the above comparison is done on the share class that has the lowest fee (0.55%) and of course not net of any advisory, ILP policy charges, wrap fee that your adviser or platform charges.

I have tabulated the Institution class and retail class returns, which have a 1.45% p.a. expense ratio instead:

The total returns are still pretty good.

Does Pimco Global Bond Fund Did Just as Well?

The objectives of the GIS Income fund may compel the manager to manage the fund in a certain way that is very different from the benchmark Index. The Index role is to express a basket of fixed income that is more representative of the global fixed income market and not to provide income.

Still, the Global Aggregate bond index is Pimco’s chosen benchmark and I seen enough of funds not beating their index.

I think it begs the question: Is the fund good or is the manager (in this case Pimco) good?

We might be able to know if we compare the Bloomberg Global Aggregate index to a more comparable fund. The Pimco Global Bond Fund’s objectives should be closer to the index and in the table below, I tabulated the metrics and performance:

As we can see the duration, maturity profile is much closer to the index, but the yield to maturity is still much higher.

The difference in terms of maturity profile of the portfolio is that the Pimco Global bond have much less exposure to the fixed income maturity above 10 years (7% vs 20%) and more of the fixed income in the 3-5 years maturity.

The performance of the Pimco Global Bond fund is much closer to the index, but still did relatively better. You got to give Pimco credit for being able to consistently do better. For your information, this fund is incepted in 1998 so that since inception performance is about 26 years.

But in an indirect way, it kind of also give you an idea of how much outperformance active management can do and how much of the performance is due to the time period, and holding a portfolio of bonds in general. I don’t think many will complain if they earn 4.1% p.a. on the Bloomberg Global Aggregate bond ETF vs 4.9% in the same time period and lament I should have chosen active management.

Remember also that we are are comparing the share class with the lowest fees. You can just shave 1% off the performance of the Pimco Global bond to give a sensing of the return if you are using a retail class.

Does Pimco GIS Income’s larger FNMA Position Drive Most of the Return?

I wonder how many investors can be unsettled when they see so much FNMA in the top 10 holdings of Pimco GIS Income fund:

FNMA stands for Federal National Mortgage Association, commonly known as Fannie Mae.

In the context of fixed income:

• FNMA securities are bonds or mortgage-backed securities (MBS) issued or guaranteed by Fannie Mae.
• Fannie Mae is a U.S. government-sponsored enterprise (GSE) that provides liquidity to the mortgage market by buying mortgages from lenders and packaging them into MBS.
• These securities are typically considered high-quality and low-risk, as they are implicitly backed by the U.S. government, although they do not carry an explicit guarantee.

The interest on FNMA tends to be fixed for 30-years and they tend to be similar if not higher than the average yield to maturity of Bloomberg Global Aggregate Bonds.

While the fund comprises mainly of FNMAs, I think it might still be down to the securities selection of Pimco that drives the returns. We can compare the performance of GIS Income against a Vanguard Mortgage-Backed Securities ETF.

If the higher yield, good performance is directly attributed only to FNMA, then a Mortgage-backed security ETF should do better than a Pimco GIS Income or Global Aggregate Bond index for the matter right?

Turns out, probably not so much. Even the calendar total return of a portfolio of mortgage-backed securities (Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC)) didn’t do much better than both.

Last Words

The return of a fund can typically be deconstructed to a few factors:

1. The ongoing cost, be it expense ratios, trading and marketing fees, access fees.
2. The performance of the underlying allocation or what it holds.
3. The manager’s skill.

And usually 1 brings down the return, 3 is typically a non factor or even works the same way as 1. So much of the return comes from 2.

Pimco is the rare fund (and I really mean rare) that despite 1, 3 may be a big reason why the performance is better.

While 12 years of performance may seem long to you, in the subsequent 12 years the performance may be poor. This is what folks have to consider when invested in an actively-managed fund. I think Pimco’s record managing the Global Bond fund over 26 years is long enough for us to review their management competency but it also highlights that the outperformance may not be so dramatic versus a Bloomberg Global Aggregate Bond index. The performance since inception should show you that good fixed income performance can come naturally to buy and hold a portfolio of fixed income securities and after the heavy retail cost, the performance difference may not be that much different.

And if you wonder why you should have a Global Aggregate Bond instead of a short term fixed income allocation these two years, this performance data may make you wonder if the lens that you view investments is too short-term focus, or you believe the current environment will remain for the next 30 years.

I don’t think the investors in a Global Aggregate Bond index should think about switching to a Pimco GIS Income fund unless they specifically see that they want a portfolio of 100% fixed income for income needs.

But you will always have this lingering question when you invest in active funds that perform so well like the Pimco GIS Income fund: If it does well in the past, will it continue to do well? The past data shows that managers do change often and how likely will the good manager reside during the time you are invested in such a fund?

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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.

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