Part 2 - PIMCO Commodity RR Fund

[wildcat]

I spoke with a friend in the "industry" the other day. He gave me the scoop on PIMCO's RR fund which happens to be rather popular around here. As many of you know, there has been some legal battle going on as to whether (from my understanding) they can use TIPS as collateral (?) They lost the decision and apparently some changes will be going on this summer - June I think - (according to an update posted on the website).

A PIMCO rep stopped by my friend's office and spoke with their staff. To make a long story short he said they are seeing major outflows in the fund. Anyone concerned? I know BUM expressed a little doubt a few months back but I thought it would be worth it to revisit the topic given the fact that so many of us have money with them.

 

[Dawg52]

I was wondering the same and what fund are you substituting if you are bailing out? 

 

[wildcat]

I don't think there is a sub quite like PIMCO's RR

TIPS are superior. Oppenheimer has a similar fund but it uses structured notes I think and the exp ratio is outrageous. All "commodity" ETFs are just stock ETFs holding commodity linked businesses.

 

[brewer12345]

There is no substitute available. What PIMCO has been shifting to is structured notes, just like Oppenheimer uses. Slightly higher cost, and I wish I could just buy the structured notes myself. But of course, I would probably get fleeced a lot worse by trying to buy the bonds...

 

[wildcat]

Brew, could you give us an idea of how inferior structured notes are to TIPS? Would this potentially raise the exp ratio of the fund come June?

 

[brewer12345]

Brew, could you give us an idea of how inferior structured notes are to TIPS?  Would this potentially raise the exp ratio of the fund come June?

What PIMCO was doing was buying TIPS and then entering into swaps, probably for something like a fixed rate of return (some interest rate) paid in return for the total return on the DJ-AIG commodity futures index. So the return would be roughly equal to:

TIPS + DJAIG - swap payments

What they will now have to do is buy a structured note. The note will be issued by a trust that holds (guess what?).....





TIPS and a DJAIG basket swap. Same thing, but you have to pay an investment bank for the privelege.

 

[saluki9]

What PIMCO was doing was buying TIPS and then entering into swaps, probably for something like a fixed rate of return (some interest rate) paid in return for the total return on the DJ-AIG commodity futures index. So the return would be roughly equal to:

TIPS + DJAIG - swap payments

What they will now have to do is buy a structured note. The note will be issued by a trust that holds (guess what?).....





TIPS and a DJAIG basket swap. Same thing, but you have to pay an investment bank for the privelege.

It's really not something to get all that worked up about. From what I hear most estimates are that the fund will take a haircut of 10-25bps

I'd say the outflows are due to one of three things...

1. A lot of people (despite advice to the contrary) bought this fund in a taxable account and are getting massive distributions so they ditching it

2. the fund has pulled back from it's highs of last year

3. People just don't understand the limitations that have been put on the fund and are overstimating their impact

either way, there really isn't a great alternative for individual investors out there. That will change soon

 

[brewer12345]

either way, there really isn't a great alternative for individual investors out there.  That will change soon

You thing there is something similar on the horizon? Heard anything specific?

 

[saluki9]

You thing there is something similar on the horizon? Heard anything specific?

Well, there is the Deutche Bank commdodity ETF (Symbol DBC) that launched last month. I'm not a huge fan of their index (55% energy), but it's some competition. It's marketed as an ETF but it's really a commodity pool, either way it is some competition.

In addition, I know some people at Barclay's who claim that they aren't too far from launching their commodity ETF

 

[brewer12345]

I think DBC is relativey useless unless you want to speculate on oil. I'd be thrilled to see ishares come out with something that replicates PCRIX, though.