What PIMCO's biggest fund means for you

How will America's top active fund fare as the mortgage-backed securities market dries up?

Jeffrey Bunce, CFA 28 March, 2017 | 5:00PM
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As of the end of February, PIMCO Income Fund in the U.S., of which the PIMCO Monthly Income Fund in Canada is a sibling, became the firm’s largest mutual fund. The U.S.-based fund reached just north of $75 billion in assets, partly driven by strong performance that has seen the fund beat almost all its peers over a five-year time period, both in the U.S. and Canada and from strong inflows into the strategy. In the U.S., the fund attracted more net inflows than any actively managed mutual fund in 2016.

While this is an impressive feat for the firm, what does this mean for investors? After all, the larger the fund, the more difficult it is to trade positions at favourable prices, and the harder it is to find ideas that will have a meaningful impact on performance. Further, a large part of PIMCO’s success has come from its stake in non-agency mortgage-backed securities. The firm bought up large swaths of these securities after the financial crisis, and they are a staple in the portfolio. But the asset class is shrinking as new issuance of these securities has all but dried up, meaning future opportunities in this space may be limited.

The Canadian fund doesn’t just invest in mortgage securities, though. It's well-diversified across the globe in developed governments, emerging markets, investment-grade and high-yield corporate debt. It has many levers to pull and the resources in place to pull them. That’s why we continue rate the PIMCO Monthly Income favourably, with a Morningstar Analyst rating of Silver. The fund is also one of the least expensive funds in the global fixed income category in Canada, another reason to continue to favour it.

Ultimately, it’s hard to know what asset level compromises a fund’s ability to outperform, but strong signs haven’t yet materialized in PIMCO Monthly Income.

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About Author

Jeffrey Bunce, CFA

Jeffrey Bunce, CFA  Jeffrey Bunce, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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