Fund face-off: PIMCO Monthly Income vs Templeton Global Bond

Salman Ahmed: Due to popular demand we're bringing back fund face-off. Today, we'll be comparing two global fixed income funds. We'll be comparing the bronze-rated Templeton Global Bond Fund with the silver-rated PIMCO Monthly Income Fund.

So Vishal, there have been many changes at PIMCO recently; it's been in the news. Why don't you brief us on that?

Vishal Mansukhani: Yes, of course. So, Mohamed El-Erian, the former CEO and co-CIO of PIMCO surprised the investment community by resigning from his position in January 2014. There was a lot of uncertainty and turmoil surrounding this decision initially, but PIMCO was quick to react and [they appointed] six new deputy CIOs, as well as a new CEO and a new president. And they also made many changes to the investment committee at PIMCO, which includes the inclusion of Dan Ivascyn who is the lead manager for the U.S. version of this fund.

As far as the uncertainty behind how it is going to affect the fund, we're not very concerned with that because PIMCO has a very good track record of making sure that the investment process remains the same after departures of key members.

Ahmed: That contrasts quite a bit with the Templeton team, that team has been pretty stable. I think where Templeton and PIMCO – where they set themselves apart from many of their global fixed income competitors is their bench strength, as you mentioned PIMCO has a very strong bench.

And the same goes for Templeton Global Bond, where Michael Hasenstab is lead manager. He's been lead manager for some time and he's supported by Sonal Desai. And in addition, they have many resources on the ground. They've got analyst in various countries that talk to politicians, business leaders to get a great understanding of what's happening in the local economies before they invest there.

Mansukhani: Of course. But there is one big difference, which is most likely the most important difference and that is the contents in their respective portfolios. So, the Templeton Global Bond Fund invests globally, but the PIMCO Monthly Income Fund does have a large allocation to U.S. mortgages, which are a main stay in the portfolio. PIMCO as a firm has a lot of resources allocated to investing in this asset class and doing a lot of detailed analysis of this asset class.

They have a lot of information on the loan quality, the collateral quality. So there is a lot of research going into that. It gives a good chance for Canadian investors to get exposure to this asset class, which typically has a low correlation with other traditional Canadian asset classes.

Ahmed: That's true. Templeton Global Bond, the fund is invested at this point primarily in emerging market and non-North American and non-developed fixed income, sovereign fixed income security, so that contrasts quite a bit.

Another area where the two funds differ is their turnover. Templeton Global Bond in general has kept portfolio turnover very low an average of less than 50% over the last five, six years, and that's quite different from PIMCO.

Mansukhani: Yes of course, so PIMCO's allocation can change drastically year-to-year. A few years ago they had a lot of emerging markets and high yield allocation, and now the largest allocation is U.S. mortgage back securities, and this drastic change in asset allocation is a result of PIMCO's firm-wide top-down macroeconomic views. Although that is a big difference between the two funds, but what's really similar [between] the funds is that they did really well last year.

Both the funds were one of the best performing fixed income funds in the global bond category. In a year where most fixed income funds did not do well, these two funds did well. So, that's one similarity.

Ahmed: We can sign off with another difference between the two and that's price. Templeton Global Bond is one of the most expensive global fixed income funds in the category and that is odd if you consider the number of assets or the level of assets that the fund has. It's got more than $70 billion just in retail assets in the strategy globally and it is one of the cheaper funds when it's offered in the U.S., but the offering in Canada is, among the most expensive.

Mansukhani: Same with the PIMCO Monthly Income Fund, it's really opposite, where in the U.S. it is not the cheapest, but over here it's one of the cheapest in the category. But something else about the PIMCO Monthly Income Fund which is interesting is the portfolio manager on a rolling 12-month basis decides how much he's going to payout in distributions.

Just to make sure he is not paying out more than what he's making, and that is – that is one aspect of portfolio management that many monthly income fund managers in Canada overlook.

Ahmed: Yeah, Templeton is an income-oriented fund, so the distribution isn't really a big factor of the portfolio.

We hope you enjoyed the return of fund face-off. For more information on these two funds or other investing topics, please visit our website www.morningstar.ca.