Market Value Exposure vs Duration Weighted Exposure

Mona

When I look at the 3/31/2013 portfolio statistics for PIMIX and PIGIX for example, they are presented in two columns. One is MV which is Market Value Exposure and other DWE which is Duration Weighted Exposure.

Lets say I have $100 invested in PIMIX and $100 invested in PIGIX. In the MV column next to mortgage it indicates 64 for PIMIX. In the DWE column next to mortgage it indicates 47 for PIMIX. For PIGIX it is 8 and 4 respectively.

I am trying to understand the meaning and difference between the two columns.

The explanation I got from Pimco, was that for PIMIX I would have $64 in Mortgages and 47% of the duration risk for all sectors of the fund, is from mortgages. In the case of PIGIX, I have $8 in mortgages and 4% of the duration risk is for all the sectors in the fund is from mortgages.

I am trying to figure out is how much I am under-weighted and over-weighted in each sector (mortgages, Investment-Grade Corporates, High-Yield,and Non-US Developed).

Is it as simple as adding up each sector row in each of the funds and comparing the sectors?

If so, in this example would I have a total of $72 ($64 + $8) out of $200 ($100 in PIMIX and $100 in PIGIX) in mortgages. Or 36% in mortgages ($72/$200).

Mona

msf

The short answer is yes - if you want to know how much (i.e. value of bonds) that you hold in each sector, you just add up how much you own in each sector from each fund you hold.

The calculation you illustrated is implicitly weighting the sector percentages of each fund by the percentage of your portfolio that each fund represents, which is correct. You'd get the same answer (36%) if you explicitly weighted your holdings. 50% of your holdings are in each of the funds, so you'd just take:
50% x 64% (PIMIX) + 50% x 8% (PIGIX) = 32% + 4% = 36%.

But ...
This is not the way bond index funds are usually constructed. By looking at a single attribute (sector), you could still have a portfolio that deviated wildly from the performance of the market, even if all your sector allocations were in line with the market. That's because you might have, e.g. all long term mortgages and all short term treasuries. Each type of bond responds differently to interest rate changes, so an unbalanced weighting like this will cause the portfolio to behave differently from the "average' bond.

The simplest approach that index funds take is a technique called stratification. Instead of sampling across one dimension (sector, as you did above), they sample across multiple dimensions (sector, duration, quality, etc.) And they try to get the right percentage in each of the boxes or "cells". Hard to find a good, short, clear web page on this; the best I've come up with so far is here: http://www.analystnotes.com/notes/los_detail.php?id=638 Look for stratified random sampling.

The duration weighted exposure of each sector is a way of "rolling up" (combining) a two dimensional sample into a single number, effectively:
average duration (for a sector) / average duration of fund x percentage in the sector.

Still not as clear a picture as knowing the percentages in each "cell", but more (or at least different) information than the unweighted sector market value.

A brief comment on PIMIX mortgage percentage: The annual report says that there is 39.8% in MBS, 44.3% in government agencies (Fannie, Freddie), and 21.4% ABS. That's a total of 105.5% (out of a total long position of 150.8%) or about 70% long in securitized debt. (Toss out the ABS component, and one's at 84.1%, or 56% of the total long position. So I'm not sure where the 64% comes from. The DWE is from Pimco's page: http://investments.pimco.com/Products/pages/314.aspx (portfolio tab).

BobC

While I realize that all of the statistics are useful in deciding how you are invested in different sectors and the kind of risk you are taking on by each sector, I would not spend time trying to analyze whether you are allocated appropriately in each sector of the bond world. Remember that you are HIRING MANAGERS, not BUYING FUNDS. You should know just as much about the person(s) running the funds you own as you do about what the fund owns. Another very important consideration for folks looking at domestic bond funds is to coinsider funds where the managers have a lot of flexibility in what they own and the strategies they are able to implement to achieve the fund's goals. I am not endorsing nor dissing PIMIX. But I would say that Dan Ivascyn is no neophyte, and his aggressive positioning of PIMIX should be looked at as part of his managing history. Despite the fund's history of high payouts, if rates remain low for an extended period of time, he could be forced to take on even more risk to maintain the high dividends. Analyzing what sector you might be underweighted in might be helpful to you, but finding out everything you can about Mr. Iverscyn's management style, history, and outlook is REALLY important.

msf

I'd thought about adding a comment about buying an index fund being simpler (and cheaper) than balancing a portfolio yourself. But there are other reasons for ascertaining your bond "centroid" (much as M*'s X-Ray does for equities). Different managers apply different strategies, and it is indeed important to understand the managers you're hiring. But they're still not the ones managing your whole portfolio.

With funds of funds, you'll often see an overall manager, who isn't responsible for a single security selection - it's this manager's responsibility to allocate the overall portfolio balance. Similar idea here. I generally use multiple active managers to construct my portfolio, and give them wide latitude. But if I see all my funds moving up (or down) in a choppy market, or if I see them all move toward a particular sector at the same time, I'll take a closer look. Is it because all these "brilliant" minds think alike, or is it because I'm not as diversified in management styles and/or holdings as I think?

The point is that delving into one's portfolio's components is actionable, even when one understands and has complete faith in the individual managers.

Mona

Reply to @msf:

So I'm not sure where the 64% comes from. The DWE is from Pimco's page: http://investments.pimco.com/Products/pages/314.aspx (portfolio tab).

msf,

To see the 64%:

1. In the link click on "Documents"
2. Scroll down 10 documents to 3/31/2013 Information Type "Portfolio Statistics".
3. Open the spreadsheet.
4. Hold down your ctrl and F key.
5. In the "Search for" box type in 766 (that's the fund number for PIMIX) and click "Find".
6. You will see Income and in the MV column next to "Mortgage" is the 64%.

Mona

Mona

Reply to @BobC:

I would not spend time trying to analyze whether you are allocated appropriately in each sector of the bond world. Remember that you are HIRING MANAGERS, not BUYING FUNDS. You should know just as much about the person(s) running the funds you own as you do about what the fund owns.

Hi BobC,

To a layperson like me, your comment implies that the fund manager has all the flexibility in the world to keep the investor diversified in bondland.

At Pimco, they have a management team that develops overall themes. In 2006 the over arching theme was sub-prime mortgages. Then each fund manager incorporates that theme into their portfolio.

That said and lets take PIGIX as an example. Per the mandate of the fund, 80% of its assets must be in Investment-Grade Corporates. This is a limitation. Another limitation is the benchmark index that the manager is trying to beat.

So in addition to knowing as much as you can about the fund manager, it seems more critical to understand the funds mandated limitations, which means it is critical to analyze and understand the total percentages in the sectors you own.

I am not saying you need to own 25% mortgages, 25% Investment-Grade, 25% High-Yield and so on to be diversified, but in your example, if you only own PIMIX, you are always going to be over-weighted in mortgages. Today, the fund has 64% of its assets in mortgages. And as you said:

But I would say that Dan Ivascyn is no neophyte, and his aggressive positioning of PIMIX should be looked at as part of his managing history. Despite the fund's history of high payouts, if rates remain low for an extended period of time, he could be forced to take on even more risk to maintain the high dividends.

So it seems to me that because of the mandates and limitations of the different funds, and I speak specifically of PIMIX, PIGIX and PDIIX, it is very important to know the how much you have in total in each sector, to obtain some degree of diversification.

Mona

hank

Interesting question. .....

Mona

Reply to @hank:

Hi Hank,

Thanks, but I simply am trying to learn.

I think you said the operative words.

we need to assess and then trust in management to implement the fund's stated approach

I trust Dan Ivascyn (the management part) and that's why I purchased PIMIX. But, if I don't assess the mandate and limitations of PIMIX, and it's the only fund I own, I am only guaranteed to be holding a lot of mortgages when I want more diversification in the bond world.

Mona

BobC

Reply to @Mona: Got your message and tried to reply. Not sure if it went through or not. Let me know. Thanks!

msf

Reply to @Mona:

Thanks Mona. I had stopped looking down the document page once I got to "Holdings" (the spreadsheet two lines above the Statistics doc).

More importantly, I had misread the date on the annual statement (first doc on the Documents page) - it is 3/31/2012, not 3/31/2013, which is why the figures I saw there didn't match.

You can find the breakdown of what PIMCO's calling mortgage bonds on the Detailed Stats tab of the spreadsheet you pointed me at.

The breakdown (classification) in the annual statements is different from that in the spreadsheet. In the spreadsheet, rather naturally agency bonds like Fannie and Freddie are grouped with mortgage bonds (not with US agency bonds). But in the annual statement(s), they are classified as "U.S. Government Agencies" holdings. So when checking whether one's holdings are over- or underweighted, one needs to be very careful that the fund's categories (such as mortgage bonds) are defined the same way as the market categories.

Mona

Reply to @BobC:

Well, I do not know if I need to raise the white flag, but here is some information and data.

The objective of PIMIX is to generate income and distributions. There are some limitations; it can only invest up to 50% in high-yield and 50% in emerging markets. Also, the fund limits foreign currency exposure to 10% of AUM. So, PIMIX in fact has more latitude to invest in different sectors than I thought, specifically its percentage in mortgages can increase or decrease significantly.

I reviewed 80 months of historical allocations of Pimco Income, starting April 30 2007 (I believe that was the inception of the fund), through March 31, 2013.

In April 2007, the fund had 100% of its allocation in mortgages and -79% in Net Cash & Equivalents (I guess this could be some/all derivatives). As of March 31, 2013 it had 64% in mortgages and -25% in Net Cash & Equivalents.

The fund had a low of 35% on November 30, 2009 and a high of 100% on April 30, 2007. In between, it had 5 months in the 30% range, 7 months in the 40% range, 2 months in the 50% range, 6 months in the 60% range, 17 months in the 70% range, 17 months in the 80% range, 18 months in the 90% range and 1 month at 100%.

Is PIMIX a stand alone multisector fund?

Mona

Sven

Reply to @Mona: Pimco as a company use derivatives extensively in their bond funds to hedge bets. Working through the annual report is redoing my qual exam again. Last year I sold my entire position of Total Return, PTTRX, and bought the ETF equivalent, BOND instead. So far it has out-performed PTTRX. Yield-wise neither fund is rewarding...