PIMCO Bullish On US Financial Bonds, Build America Bonds & MBS

March 2012 – When you invest in PIMCO’s Total Return Fund (PIMCO’s largest and most popular fund), you are not necessarily getting the firm’s best ideas. The fund must limit its holdings to primarily investment grade, intermediate term bonds. Within these constraints, the PIMCO Total Return Fund does its best to achieve the highest return.  As the name implies, PIMCO’s Unconstrained Bond Fund is different.

PIMCO’s Unconstrained Bond Fund gives investors a clear look at PIMCO’s thinking.

What is PIMCO thinking? According, their most recent monthly Unconstrained Fund commentary:

  • They remain focused on high-quality munis and are bullish on longer-dated Build America Bonds. (BaBs)
  • Reduced long exposure to emerging market (EM) currencies except China (CNY). They are long the US dollar and short the Japanese Yen, Euro, and Australian Dollar.
  • They are increasing holdings of Brazilian and Mexico debt.
  • Selectively buying Agency Mortgage Backed Securities as the sector remains attractive.
  • In terms of corporate debt, they like financial companies with strong balance sheet.
  • While they have a significant holding of investment grade debt, they are hedging that partially by shorting High Yield instruments like Credit Default Swaps. If you don’t understand this one, do not worry, it’s complicated.

The fund gives a detailed breakdown of its February performance numbers. The fund made money on their holdings of corporate bonds, especially financials since the sector outperformed the Investment Grade Corporate sector. Exposure to the industrial sector was also positive. Net long Agency Mortgage Backed Securities (MBS) exposure, including relative value coupon trade proved little negative for the month. However, modest exposure to non-Agency MBS proved beneficial for the fund. Exposure to Munis, BABs and Treasury Inflation Protected Securities (TIPS) were neutral for returns.

Foreign currency exposure overall added to the fund’s return with long positions in (MYR), Mexico (MXN) and India (INR) and short position in Japan (JPY) proving positive. However, short positions in Australia (AUD), Europe (EUR), Hungary (HUF) and UK (GBP) turned negative for the month.

Term (as of Mar 20, 2012) Returns
Last 30 days -0.11%
Last 90 days 0.84%
One year 0.92%

If you invest in this fund, you should expect more performance volatility then the Total Return Fund. 

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