August 19, 2019: PIMCO Income Fund and Other Total Return Bond Funds Update

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PIMCO Income Fund and Other Total Return Bond Funds Update

PIMCO income fund (PONAX) has been one of the best star players among the total return bond funds used for our total return bond portfolios (see What We Do->Brokerage Investors page) for the past 10 years. Unfortunately, it has underperformed badly this year. In this newsletter, we look at the latest performance of these funds and discuss performance issues.

Latest total return bond fund performance

First, let’s look at the following table for the latest returns:

Return Comparison (as of 8/16/2019):

Name	YTD Return**	1Yr AR	3Yr AR	5Yr AR	10Yr AR	15Yr AR
PBDAX (PIMCO Investment Grade Corp Bd A)	12.4%	11.9%	4.6%	4.6%	6.6%	N/A
VWEHX (Vanguard High-Yield Corporate Inv)	10.9%	7.3%	5.3%	4.7%	7.5%	6.2%
MWTRX (Metropolitan West Total Return Bond M)	8.8%	9.9%	3.2%	3.1%	5.4%	5.4%
VBMFX (Vanguard Total Bond Market Index Inv)	8.7%	10.0%	2.8%	3.1%	3.7%	4.1%
Schwab Total Return Bond	8.6%	8.6%	5.2%	4.1%	7.4%	8.0%
PTRAX (PIMCO Total Return Admin)	8.3%	9.2%	3.5%	3.1%	4.3%	5.0%
TGMNX (TCW Total Return Bond N)	7.9%	9.4%	2.9%	2.9%	5.0%	5.5%
LSBRX (Loomis Sayles Bond Retail)	7.6%	4.0%	2.5%	1.4%	5.9%	5.9%
DLTNX (DoubleLine Total Return Bond N)	6.0%	7.5%	3.2%	3.3%	N/A	N/A
PONAX (PIMCO Income A)	4.2%	5.1%	4.7%	4.4%	8.6%	N/A

Ten year returns:

Detailed link >>>

In the above table, we also include two index (benchmark) funds: Vanguard total bond index (VBMFX) and Vanguard high yield bonds (VWEHX). Furthermore, Schwab Total Return Bond is the representative total return bond portfolio that uses these funds as candidate funds.

What happened to PIMCO income fund?

PIMCO income fund (PONAX) had had a stellar performance for the past ten years until the beginning of this year. In fact, from the above table, it had 8.6% annualized return for the past 10 years, way better than other funds (the second best is PIMCO Investment grade PBDAX, 7.5% and the third one is Lommis Sayles LSBRX 5.9%).

Bloomberg reported its recent underperformance. The main reasons cited are:

It has virtually no long term bond exposure. In fact, its holdings’ average duration is only 0.35 years on July 31. Meanwhile long term bonds have staged a huge rally recently.
It had very little corporate bond exposure (on July 31, it was 7%) while its largest holdings are mortgage-backed securities (24% as of 7/31/19). Mortgage-backed securities have trailed corporate bonds by some big margins this year.
What’s more, its Argentine government bond holdings have made negative impact on its returns as Argentine bonds have undergone some big loss. In fact, this has caused the fund to lose over 1% in this month so far.

One can say this is a temporary setback as its bets are not aligned with the short term markets (though the Argentine bond exposure is for sure a bad bet). It’s actually not surprising that a good fund experienced some temporary issues. Whether or not this is a long term turning point for PIMCO income fund is anyone’s guess.

The other laggard is DoubleLine total return fund DLTNX that has ‘only’ 6% YTD return, compared with VBMFX’s 8.7%. This is not surprising as the fund is famous in its consistent holdings of security-backed mortgage bonds (86% on 7/31/19). The fund still outperformed VBMFX for the past 3 and 5 years, though its 5 year annualized return (3.3%) is not much better than VBMFX’s 3.1%.

The recent strong rise of long bonds (along with other bonds but with much less degree) has propelled the index fund VBMFX to have close/comparable returns for the past 5 years compared with many star total return bond funds. However, these excellent bond funds still hold much better records longer terms (such as the 10 year period).

Unfortunately, regardless how good a fund or fund manager is, there will be a period of time when such a fund underperforms. In fact, a fund can not forever outperform. This has happened so many times before. Remember Bill Miller’s Legg Mason Value Trust fund’s 15 consecutive years outperformance against S&P 500 till 2005, only to see it started to falter badly? How about Bill Gross’ PIMCO total return bond fund that started to lose its charm after a long period of outperformance?

Fortunately, our total return bond fund portfolio Schwab Total Return Bond has maintained very comparable short term (YTD 8.6% vs. VBMFX’s 8.7%) return while keeping a stellar outsized outperformance for the past 3, 5, 10 and 15 years. Even for the best performer PIMCO income PONAX, since 4/4/2007 when this fund started, our portfolio’s annualized return is now 7.5% vs. PONAX’s 7.6%, virtually a toss up.

The takeaway from the recent performance figures is that one should not rely on a star fund/manager. Instead, the best practice is to adopt a strategy similar to the one employed in our total return bond portfolio: invests in a winner instead. Its effectiveness in fixed income investing has been proved again and again.

Market overview

Bond yield curve (10 year Treasury note’s yield minus 2 year Treasury note’s yield) briefly went to negative last week. This gave a strong signal as when this happened in the past, it usually preceded a recession. Long bonds rose dramatically. In fact, the 30 year Treasury bond yield reached the historical low last week. Stocks went on to a mini correction. If we look at a bit longer term, we can see how the major stock market indexes have performed since 2018:

Basically, regardless of large stocks recent strength, majority (small, mid cap) stocks have gone nowhere since the beginning of 2018. We suspect many individual retirement and investment accounts have not enjoyed as much rise as what the headline index news show.

It’s worth to reiterate that in the current high valuation, overly extended and seemingly tired markets, investors should exercise prudence and stay the course.

For more detailed asset trend scores, please refer to 360° Market Overview.

In terms of investments, even after the recent retreat, U.S. stock valuation is still at a historically high level and a bigger correction is still waiting to happen. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future.

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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