This year alone, the Pimco Income fund has attracted more than €28bn (£25bn) in net new money from European investors, according to Morningstar data. This is almost half of all net inflows into unconstrained bond funds this year, and has made the $64.3bn strategy the world’s largest actively managed fund.
There are few, if any examples of funds that have attracted so much money in such a short time. Even the inflows the Standard Life Global Absolute Return Strategies (Gars) fund saw in its heydays are peanuts compared with the money the Pimco Income Fund has attracted this year.
So, why are investors rushing into Pimco Income in such unprecedented numbers?
Arguably, recent investors have been attracted by its stellar track record. Even after accounting for hedging costs (about 150 basis points), the fund has managed to provide unrivalled risk-adjusted returns.
The majority of the portfolio is invested in investment-grade bonds, yet has returned 4% annualised over the last three years. For euro investors who hedge their foreign-currency exposure, that leaves a return of about 2.5%. This not much by historical standards, but it’s a lot more than your average European fixed income fund has returned over that period (see chart below).
But what explains this solid performance? One of the earliest investors in Pimco Income, Bank Audi’s head of advisory Walid Moukarzel, can help answer that question.
“We have been invested in Pimco Income since 2013 when the fund first opened in Europe,” he says. “Throughout the more than four years we have been invested in the fund they have navigated the interest rate risk very well, while at the same time finding areas with income without compromising the risk profile of the fund.”
Mortgage opportunity
But there’s another important driver of recent performance. Unlike most of its competitors, Pimco Income has had a large allocation to US mortgages (now about a third of the portfolio). “They have been fortunate to be a specialist in that,” says Moukarzel.
Bart van de Ven, a private banker the Belgian wealth management boutique Accuro which was been invested in Pimco Income since 2015, agrees.
“The fund’s allocation to mortgage-backed securities has been their main driver of outperformance in recent years,” says Van de Ven.
But this windfall is unlikely to last forever, both fund selectors realise.
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