PIMCO income A expense ratio

ET91

I just noticed that the expense ratio for PIMCO income A is 1.45%. I realize that they are trying to slow down inflows (I think that this correct), however, 1.45% is too much. Assets are at $130 billions as of August 11, 2019. On the other hand, expense ratio for PIMCO total return A are 1.05%. Not sure how much outperformance PIMCO income can accomplish in the future with a 1.45% expense ratio in a low yield environment.

msf

Much of the difference is in how much borrowing the funds do. PTTAX pays 0.25% in interest expenses, while PONAX pays 0.55%. I assume this is borrowing is for the purpose of leverage. Under "Leveraging Risk" the prospectus reads:

"to the extent a Fund borrows money, interest costs on such borrowings may not be recovered by any appreciation of the securities purchased with the borrowed amounts"

The remaining 10 basis point difference in ERs is in the management fee, 0.65% vs 0.55%. You can eliminate the 0.25% 12b-1 fee and also cut the management fees to 0.50% and 0.46% respectively (just a 4 basis point difference) by buying the institutional class shares (with a brokerage transaction fee).

The current rate of interest (low yield environment) isn't as important as the spread between short term and long term rates when it comes to making money by leveraging fixed income securities. What matters is that you make more on the securities you buy than you pay in interest for the cash to buy those securities.

ET91

Thanks msf. I didn't realize how much PONAX pays in interest expenses. Not quite closed end fund levels but still high.

ron

I have PIMIX and started to move out into others, PHYZX, VWEAX. PDBZX and WATFX.

Tarwheel

I’m more concerned with its performance lately. It has been sucking wind. Pimco must be shorting treasuries or something because it’s been dropping on days when the general bond market is up. Down 0.5% today alone!

msf

IMHO this is not a big surprise. ABSs tend to have negative convexity and do not respond well to sharp drops in interest rates. Since May, when the 10 year Treasury was still fluttering around 2.4%, the 10 year yield has plummeted to 1.56% today (8/12/19).
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019

Mortgage and other asset-backed bond funds have responded predictably. Check out, e.g. VMBSX, FMBPX, FMSFX, all vs. VBTLX.
Here's a three month plot from M*.

Sure, between Aug 1 and Aug 5, PIMIX did significantly worse than its ABS peers, but I'd be more concerned about the broader trend of this kind of fund. (Of course, with PIMCO one is never quite sure of what it is doing; that adds another level risk/reward.)

See my post from April 2018:
https://mutualfundobserver.com/discuss/discussion/comment/100394/#Comment_100394

ET91

thank you all for your resonses

Ted

@MFO Members: As a holder of Pimco Income Fund I admit the expensive is high, but what concerns me is the size of the fund $103.3 Billion. I beliece it's size has hurt performance over the last couple of years despite Dan Ivascyn's claim that it hasn't.
Regards,
Ted

mcmarasco

I’d like to echo the concern over the extremely poor performance recently, in particular the month of August.

Any other thoughts on why PIMCO income is performing so poorly relative to its category and peers?

It seems to defy logic.

Is this a portent to move in a different direction? If so any suggestions?

Thank you for any further thoughts or ideas. Matt.

msf

Ted said:

@MFO Members: As a holder of Pimco Income Fund I admit the expensive is high, but what concerns me is the size of the fund $103.3 Billion. I beliece it's size has hurt performance over the last couple of years despite Dan Ivascyn's claim that it hasn't

Here's a chart comparing PIMIX's performance over the past two years with that of the average mult-sector bond, VMBSX (mortgage backed index fund), a couple more mortgage-backed bond funds, and VBLTX (IG bond index fund). It excludes August 2019, when as @mcmarasco points out, PIMIX had anomalous performance.
Comparison graph 8/13/2017- 8/1/2019

If fund size were a significant factor over the past couple of years, one would expect this graph to show lackluster performance. That's not how it appears to me.

Regarding the last eight trading days, this is a fund that uses all sorts of derivatives as well as basic leveraging. Leveraging alone has got to weigh heavily on performance.

The spread between the 3 month T-bill and the 30 year T-bond has gone from 37 basis points on Aug 1 (2.44% - 2.07%) to 14 basis points (2.14% - 2.00%) in just a few days. Versus the ten year, the spread has fallen from -17 basis points (10 year yielding less) to -35 basis points. Not quite as huge, but still rather dramatic.
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yield

Look at the average duration of the fund's holdings. They range from a "high" of 2.14 years for securitized debt through virtually zero for IG and other gov debt (0 ± 0.5%) down to -2.35 years for foreign developed market debt.
https://www.pimco.com/en-us/investments/mutual-funds/income-fund/inst

This is a fund positioned for rising rates. It got caught flat footed. It happens, especially with funds that make macro calls. While size limits PIMCO funds' ability to trade on anything but macro movements, that's been true for decades. This is not a recent change because of growth in the past few years.

mcmarasco

Thanks msf!!!

It certainly seems this fund is positioned for rising rates; not sure if that is going to come to fruition any time soon.

I do not want to bail in PONAX/PIPNX, especially now, but i am a bit conflicted.

Any thoughts?

sfnative

The half percent drop on 8/12 is probably attributable to the fund's bet on Argentine bonds.

mcmarasco

sfnative, thanks for the insight!!!

Do you are anyone else have any thoughts or opinions regarding the long-term viability of holding onto this fund? I've had it for several years and it has been good, but going forward I do have "some" reservation.

Are there other more "nimble" options?

Matt

Ted

#MFO Members: Upon further review I bought more PONCX with the proceeds of my Hertz Bond. Althought I'm somewhat concerned with it's size , the monthly interest payment in terms of yield will be greater than any CD or money market fund in this current interest rate enviornment..
Regards,
Ted

Old_Skeet

Old_Skeet plans to continue to hold my position in PONAX and perhaps buy more on weakness. It is one of eight funds that I currently hold in my income sleeve.

Starchild

I've been holding PIMIX for a couple of years now. My timing was a bit off, being that rate hikes bit into my principal, but it does return a good monthly yield. It's my only fixed income fund, and I'll stick with it. From what I can gather, they seem to know what they're doing.

rforno

I owned PIMIX years ago and the ER was something like .60 or .70. For them to be charging 1.XX ERs on classes including their institutional, for that reason alone I wouldn't touch it with a barge pole. Wonder if they've gotten too comfortable in their ways? *shrug*

I agree with Ted (yes, it can happen!) that the bloated AUM does not warrant such a high ER unless they're just being greedy. It's practically doubled in 10 years if memory serves. But really, given PIMCO's many black boxes and offsetting swaps and other moving parts, how can one effectively manage a bond fund that big forever? I know complexity breeds expense, but this is bit much imo.

msf

Memories fade. Sometimes we remember what we want to remember.

My own memory says that PIMCO funds were generally expensive, though I believe that there was a period of time when they actually got cheap. I think at one time Bill Gross said something about making fees more reasonable. But that's my fuzzy memory, and it's harder to find records of such pronouncements than it is to dig up old filings:

PIMIX current expenses (July 31, 2019 summary prospectus):
Management Fees: 0.50%
12b-1 Fees: N/A
Other Expenses: 0.55% (all of which is interest expense, per footnote)
Fee Waiver: N/A
Total ER: 1.05%

PIMIX expenses 10 years ago (July 31, 2009 prospectus):
Management Fees: 0.45%
12b-1 Fees: N/A
Other Expenses: 0.61% ("reflect interest expense", per footnote)
Expense Reduction (0.05%)
Total ER: 1.01%

rforno

Hrm. Maybe I mis-read things at the time, which was entirely possible then.

msf said:

Memories fade. Sometimes we remember what we want to remember.

My own memory says that PIMCO funds were generally expensive, though I believe that there was a period of time when they actually got cheap. I think at one time Bill Gross said something about making fees more reasonable. But that's my fuzzy memory, and it's harder to find records of such pronouncements than it is to dig up old filings:

PIMIX current expenses (July 31, 2019 summary prospectus):
Management Fees: 0.50%
12b-1 Fees: N/A
Other Expenses: 0.55% (all of which is interest expense, per footnote)
Fee Waiver: N/A
Total ER: 1.05%

PIMIX expenses 10 years ago (July 31, 2009 prospectus):
Management Fees: 0.45%
12b-1 Fees: N/A
Other Expenses: 0.61% ("reflect interest expense", per footnote)
Expense Reduction (0.05%)
Total ER: 1.01%

sfnative

Interest expense is what the fund pays to borrow money -- it is not paid to PIMCO. They get paid 50 bps (for the institutional class shares anyway) which is pretty competitive (although they raised their fees 5 bps about a year ago even though they were amassing huge increases in AUM).

MikeM

PONAX was cream-of the-crop years ago, but hasn't been special for a couple. Every dog has its day. For the last couple years my only domestic bond fund is IOFAX, but I'm sure at some point that will change too. Nothing stays on top forever, hence the story for PONAX. Actually if only looking at net expense ratio, PONAX is a bargain compared to IOFAX.

Since most of my money is in a tax deferred IRA and 401k, yield comparisons mean little to nothing for me. All about total return.

Starchild

I'm not sure what you guys are looking at, but PIMIX is .74 @ Vanguard (and I'm getting tired of it getting pummeled)

msf

See my post above. I'm looking at the current (July 31, 2019) summary prospectus.

Vanguard is reporting the ER as of 6/10/2019, i.e. prior to the current prospectus. So its figure isn't current. It comes from last year's prospectus, dated July 30, 2018.

The only difference is that "Other Expenses" (interest expense) is stated to be 0.24%. This is going to vary year by year, as the fund borrows more or less, and as rates rise or fall.

Sven

msf's reported ER is corrected (per PIMCO prospects 7/31/19). It is more than double the ER from a year ago.

Look like PIMCO missed several marco calls this year and the fund is lagging its peers. When the asset is so large it is very difficult to make changes quickly without affect other bond prices.

msf

I went to a talk by the managers of MWTRX (20 years ago?) before MetWest was acquired by TCW. One of the audience questions was how they would compare themselves with PTTRX. They said that PIMCO funds (and PTTRX in particular) were so large that PIMCO had to manage their funds top down (macro calls), while at MetWest they focused on issue selection.

(Since MetWest was acquired by TCW and their funds have grown so large, I suspect they also no longer have the ability to significantly benefit from astute issue selection.)

This is not necessarily a bad thing; it's just a different approach. But like any high conviction approach, it is subject to periodic bad calls (in hindsight). It comes with the territory. One should understand this and not let rapid losses take one by surprise. (This is a reason why I prefer not to ignore "upside risk" - it can be indicative of future downside risk.)

Over at Templeton, Hasenstab is known for managing this way. So it should not come as a surprise that he too got caught by the drop in the Argentina peso.
https://mutualfundobserver.com/discuss/discussion/52009/hasenstab-loses-1-8bn-in-single-day-as-big-bet-blows-up-femgx-tpinx

His Templeton funds are quite different from PIMCO's funds, so I'm not saying they're directly comparable. Still, I find Hasenstab's funds to be more transparent (notably with respect to currency exposure), making it easier to figure out what happened.

Regarding ERs: PIMIX's actual ER last year was 1.05%. That's from the annual report, dated 3/31/2019. Interest expenses stated in a prospectus (which is what all the figures before this post are quoting) are forward looking guesses, usually based on last year's actual expenses. We won't know what PIMIX is actually spending on interest now until it completes a reporting period.

To conclude with another knock on M*'s new format - M* used to give both ER figures (prospectus and annual report), but now doesn't seem to give the actual (annual report) figure. Giving both numbers had caused much confusion, but IMHO omitting data is not the right "solution".