Van de Ven: “The available pool of mortgage securities is drying up, so this source of performance is set to become less important.”
And given the unprecedented amounts of money flowing into the fund, the relative size of the mortgage portfolio is likely to dilute over time anyway.
Moukarzel has also identified this problem: “The pool will become smaller and opportunities in the mortgage space will be more limited going forward. So they need to find other sources of income and become more of a mainstream income fund.”
This notwithstanding, Moukarzel is determined to make the best out of Pimco’s mortgage opportunity for as long as it lasts. “This year, we were the first investors in the Ucits version of Pimco’s mortgage opportunity fund, which we own alongside the Pimco Income fund,” he says. This fund has returned 12% in US dollars year-to-date (Moukarzel’s clients tend to have the dollar as their base currency), though volatility has shot up and returns have started to suffer in recent months.
Where’s the big new idea?
So, Moukarzel and Van de Ven both insist Pimco Income is in need of “a big new idea”.
Their patience is likely to be tested, however. The fund’s lead manager Dan Ivascyn said in a recent video post on the Pimco website that he is aiming to keep finding income through “a whole slew of trades around the globe” rather than via one or two concentrated new ideas.
But even if Ivascyn and his team struggle to replace the income they currently generate on their mortgages, investors are unlikely to ditch Pimco Income soon.
“They have built a lot of goodwill over the years, and no strategy can do well forever, that’s a fact,” Moukarzel knows.
“But if they start going through a weak period, we’ll be supportive, we’ll keep talking to them and monitor the fund more closely. But you have to give them some leeway after a run of such strong performance.”
What’s the alternative?
And even if Moukarzel wanted to jump ship, he struggles to find any alternative seaworthy vessels to board. “We have a couple more flexible bond funds, but their performance has been flattish. No fund has been able to match Pimco’s performance.”
Van de Ven agrees there isn’t really an alternative to flexible bond funds in the current environment.
“Buy and hold is simply not going to work in fixed income. You have to be active, and also remain invested as broadly as possible,” he says.
Key-man risk?
As Moukarzel rightly said, no fund outperforms forever. Typical reasons for deteriorating performance are a fund growing too big too quickly or so-called key-man risk.
The pace of asset growth Pimco Income has seen recently would be problematic for many a fund (having grown too fast is widely regarded as a reason for the turn in performance of the once-prized GARS fund), but Moukarzel doesn’t see its large size as an issue for Pimco Income.
“The investment universe of the fund is trillions of dollars in size, so the fund can still grow a lot larger without constraints,” he says.
Unsurprisingly, fund manager Ivascyn doesn’t see a size problem either. “Not being attached to a benchmark and having a global opportunity set, and very flexible guidelines, give us tremendous advantages in terms of handling the scale. If we ever got concerned with the size of the fund, we’d close the fund, but we are a long, long way from that point,” he says.
And what about the key-man risk? Pimco has a history of that. After the shock departure of its star manager Bill Gross in 2014, Pimco saw large outflows and performance of many of its funds suffered for a time. Is a repeat of this to be feared?
“Ivascyn is very important within Pimco, but it’s really not a one-man show,” says Van de Ven, while Moukarzel praises the fund’s “team-based approach” and Pimco’s “vast resources and unique expertise” in fixed income.
The main challenge for Pimco Income in the future will simply be to continue to find that income in an environment of low, but rising rates, and with diminishing help of an auxiliary engine in the form of US mortgages.
