Your Thoughts On PIMCO Total Return?

[Marcretire]

I've been considering various fixed income options, which members of this forum have kindly given their feedback on, and a friend has given me yet another option to consider in the PIMCO Total Return bond fund. As a Vanguard customer, I had been considering the VG Total Bond Market index fund, but, PIMCO is on my radar now and wonder if anyone has experience with the fund. Thanks.

 

[brewer12345]

I have not done the research myself, but Kiplinger's has repeatedly said that if you buy the Harbor Bond Fund you get essentially the same thing (including Bill Gross' talents) at a fraction of the management fee. But you'd need to satisfy yourself that that is actually the case.

 

[Architect]

I own it in my 401k, as it's the best of the very few bond funds available to me. I have 100% of the 401k in it, as I have 3X that amount outside the 401k, which is presently in bonds, but for tax reasons will eventually go back into stocks.

At any rate it's a great fund. It earned 9%+ in 2007, and last year, which was a tough one for bond funds, it still pulled off almost a 5% gain. The cost is high, about .5% I think for the shares I have access too, but it's the best they offer. Better than any damn Fidelity option.

 

[tulak]

I owned it briefly, but didn't care for its high allocation to cash. The way I looked at it, I'm buying a bond fund, not a cash fund. If I had the choice, I'd go with the Vanguard Total Bond Fund. Not sure what it did for 2007, but in 2008 it earned 5%. Plus it has a low ER.

 

[ziggy29]

I own it in my 401K and it's done well. We're fortunate enough to have the lowest-cost share class (0.43%, I think).

 

[Alan]

DW had it in her 401k for about 10 years before she ER'ed in 2004. We were very pleased with its return. expenses were less than 0.5% IIRC

 

[kyounge1956]

What's the ticker of the fund you are you asking about? There are several PIMCO funds with very similar names. PTTRX has a high cash allocation: >80% last time I checked.

 

[ziggy29]

What's the ticker of the fund you are you asking about? There are several PIMCO funds with very similar names. PTTRX has a high cash allocation: >80% last time I checked.

The main reason you see this is because most of this comes from M* data and many sites don't seem to know how to handle leveraged positions on both the short and long side. For example, PTTRX is 567% long cash and 570% short cash (for a net 3% short position). It is 110.2% long bonds and 10.6% short bonds, for a net 99.6% long position.

Many sites that use this data don't know how to display it.

 

[kyounge1956]

The main reason you see this is because most of this comes from M* data and many sites don't seem to know how to handle leveraged positions on both the short and long side. For example, PTTRX is 567% long cash and 570% short cash (for a net 3% short position). It is 110.2% long bonds and 10.6% short bonds, for a net 99.6% long position.

Many sites that use this data don't know how to display it.

Would you explain further please? The >80% figure was from the pdf "Fund Information Sheet" provided by my 457 plan administrator, but the data on the sheet may well come from M*. How can a fund be more than 100% in anything, let alone over 100% of two things in the same fund?

Anyway, it sounds like this is still an actively managed fund which would not provide index-tracking exposure to bonds as an asset class (which is what I was looking for) but rather is restricted to that portion of the bond market which the fund manager thinks highly of at the moment. Or am I making another mistaken interpretation of these figures?

 

[brewer12345]

How can a fund be more than 100% in anything, let alone over 100% of two things in the same fund?

Leverage is usually the answer. In the case of a bond fund, it is not uncommon for the fund to lend out a bond in return for cash collateral and then invest the cash in something liquid and short term.

 

[Architect]

I'm not sure the cash allocation means what you think. One explanation I heard is that the fund is so large that it can't just go out and buy up bonds (it would distort the markets too much). So what they often do is invest via derivatives, and keep the cash as collateral. For example, they decide to invest in Treasuries, instead of buying actual Treasuries, maybe they'll buy a derivative based on them.

 

[kyounge1956]

I'm not sure the cash allocation means what you think. One explanation I heard is that the fund is so large that it can't just go out and buy up bonds (it would distort the markets too much). So what they often do is invest via derivatives, and keep the cash as collateral. For example, they decide to invest in Treasuries, instead of buying actual Treasuries, maybe they'll buy a derivative based on them.

That makes sense but I am still uncertain whether this fund is one I want to use. I've always thought derivatives are more volatile than stocks, so will a "bond" fund that is really mostly invested in bond derivatives reduce the volatility of my portfolio? Given a 70% allocation to PTTRX, would it act like a portfolio with 70% bonds, or a portfolio with 70% derivatives??

I want bonds in my 457 account to reduce the volatility of the portfolio as a whole. Will a fund like this have (roughly) the same return, standard deviation and correlation to equities as a bond index fund would? If not, it isn't what I'm looking for, even if it's a very good fund when considered in isolation. Now I am getting anxious because the only other option I have for adding a high proportion of bonds to the 457 is to switch over to Vanguard Target Retirement Income (VTINX). This fund holds Vanguard Total Bond Market Index and Vanguard Inflation Protected Secs (again according to the custodian's Fund Info sheet). I haven't had time yet to look up and see what's in those funds. >sigh<

 

[kyounge1956]

The main reason you see this is because most of this comes from M* data and many sites don't seem to know how to handle leveraged positions on both the short and long side. For example, PTTRX is 567% long cash and 570% short cash (for a net 3% short position). It is 110.2% long bonds and 10.6% short bonds, for a net 99.6% long position.

Many sites that use this data don't know how to display it.

Would this caveat also apply to the M* portfolio Xray, or do we assume they know how to display their own data? I did an Xray for the asset allocation tutorial thread, and it said I only have about 1% bonds. Last time I checked I had about 6% of my account in PTTRX, and 6% in the fund but only 1% of the portfolio showing up as bonds would be consistent with ">80% in cash" meaning just what it sounds like. I'm so confused

 

[FinanceDude]

Until Bill Gross dies or retires, its a solid pick. DW's 401K has it as a choice, and we are glad she had 30% of her balance in there last year, up from 10% in 2007........

 

[ziggy29]

Would this caveat also apply to the M* portfolio Xray, or do we assume they know how to display their own data? I did an Xray for the asset allocation tutorial thread, and it said I only have about 1% bonds. Last time I checked I had about 6% of my account in PTTRX, and 6% in the fund but only 1% of the portfolio showing up as bonds would be consistent with ">80% in cash" meaning just what it sounds like. I'm so confused

No, M* knows how to handle their own data. Some custodians (I know Fidelity is one) use their data but can't handle leverage and/or short positions correctly. In my Fidelity 401K, my asset allocation shows something like 25% cash because I have about 30% in PTTRX. But according to the M* data, it really is closer to 30% bonds.

 

[Architect]

Just view it as a bond fund and don't worry about it. They do a good job of keeping a steady principle with generally a 5%-10% coupon/dividend return, just as you would expect from a bond fund.

That makes sense but I am still uncertain whether this fund is one I want to use. I've always thought derivatives are more volatile than stocks, so will a "bond" fund that is really mostly invested in bond derivatives reduce the volatility of my portfolio? Given a 70% allocation to PTTRX, would it act like a portfolio with 70% bonds, or a portfolio with 70% derivatives??

I want bonds in my 457 account to reduce the volatility of the portfolio as a whole. Will a fund like this have (roughly) the same return, standard deviation and correlation to equities as a bond index fund would? If not, it isn't what I'm looking for, even if it's a very good fund when considered in isolation. Now I am getting anxious because the only other option I have for adding a high proportion of bonds to the 457 is to switch over to Vanguard Target Retirement Income (VTINX). This fund holds Vanguard Total Bond Market Index and Vanguard Inflation Protected Secs (again according to the custodian's Fund Info sheet). I haven't had time yet to look up and see what's in those funds. >sigh<

 

[brewer12345]

That makes sense but I am still uncertain whether this fund is one I want to use. I've always thought derivatives are more volatile than stocks, so will a "bond" fund that is really mostly invested in bond derivatives reduce the volatility of my portfolio? Given a 70% allocation to PTTRX, would it act like a portfolio with 70% bonds, or a portfolio with 70% derivatives??

You are misunderstanding. Derivatives aren't evil or inherently volatile. If used properly they can help you reduce risk or have the same exposure as cash instruments, but with lower cost and more liquidity. Holding a pile of treasury bonds can be exactly the same exposure as holding a pile of cash and some long treasury futures. So don't get hysterical when you see the word "derivative."

 

[kyounge1956]

You are misunderstanding. Derivatives aren't evil or inherently volatile. If used properly they can help you reduce risk or have the same exposure as cash instruments, but with lower cost and more liquidity. Holding a pile of treasury bonds can be exactly the same exposure as holding a pile of cash and some long treasury futures. So don't get hysterical when you see the word "derivative."

I think we have arrived at "I shouldn't invest in things I don't understand". If PTTRX' status as a solid pick depends on the fund manager (per FD's earlier comment), that is not consistent with what I have understood of index funds, and an index fund is what I am looking for. I know very little about derivatives of any kind and do not understand what "futures", or "long" and "short" mean at all. Sounds like time for some more reading.

 

[brewer12345]

I think we have arrived at "I shouldn't invest in things I don't understand". If PTTRX' status as a solid pick depends on the fund manager (per FD's earlier comment), that is not consistent with what I have understood of index funds, and an index fund is what I am looking for. I know very little about derivatives of any kind and do not understand what "futures", or "long" and "short" mean at all. Sounds like time for some more reading.

I'd be very surprised indeed if VG's bond funds didn't use derivatives on a pretty regular basis. So either you want an index fund and you trust the fund company to replicate the index for you on a cost effective basis, or you want a managed fund where you are paying for the (hopefully) superior acumen of the managers. Either way, you pays your money and you trust the fund company. Your alternative is to buy securities directly, which may proe to be expensive and cumbersome.

Not trying to rain on your parade, but you should be aware that buying an index fund doesn't mean their won't be derivatives usage. If you don't want to know what goes in the sausage, don't look.

 

[Marcretire]

Thanks for the helpful insights. In doing my due diligence on the retail version of the fund, PTTAX, I learned it has a pretty high ER of .90%, which I might swallow given the successful trackrecord of the fund, but, the dealbreaker for me is they charge a load, around 3.5%, which I can't swallow. All in all, I think I'm leaning toward Vanguard Total Bond Maket Index fund as an alternative.

 

[FinanceDude]

I think we have arrived at "I shouldn't invest in things I don't understand". If PTTRX' status as a solid pick depends on the fund manager (per FD's earlier comment), that is not consistent with what I have understood of index funds, and an index fund is what I am looking for. I know very little about derivatives of any kind and do not understand what "futures", or "long" and "short" mean at all. Sounds like time for some more reading.

Not JUST a "fund manager", but Bill Gross. Here's a little info on Mr. Gross: http://en.wikipedia.org/wiki/Bill_Gross_(PIMCO)

PTTRX is the institutional share class of fund. I am not sure whether a small investor can directly buy it. If you can buy that class, there's no front load, and an ER of .43

 

[ziggy29]

Thanks for the helpful insights. In doing my due diligence on the retail version of the fund, PTTAX, I learned it has a pretty high ER of .90%, which I might swallow given the successful trackrecord of the fund, but, the dealbreaker for me is they charge a load, around 3.5%, which I can't swallow. All in all, I think I'm leaning toward Vanguard Total Bond Maket Index fund as an alternative.

You don't have PTTDX available as an option? That seems to be a retail version of the fund, too -- with no load, and its ER is .75% instead of .90%.

 

[kyounge1956]

Not JUST a "fund manager", but Bill Gross. Here's a little info on Mr. Gross: http://en.wikipedia.org/wiki/Bill_Gross_(PIMCO)

PTTRX is the institutional share class of fund. I am not sure whether a small investor can directly buy it. If you can buy that class, there's no front load, and an ER of .43

It's listed as one of the pre-selected funds available in my 457 plan at work. Maybe it's the institutional version because it is within an employee retirement savings plan?

I mean nothing negative about Mr Gross. He could be the best bond fund manager in the world and I'd still be worried, because this appears to be an actively managed fund, so I can't assume that its return, standard deviation and correlation with other asset classes are similar to those of an index fund. I am looking for an index fund because the standard deviation/return/correlation of the index is what I used in estimating the risk & return of my portfolio as a whole and choosing an asset allocation. I started with apples and am concerned that if I switch to oranges in the middle of the process, the results will not be as expected.

I need to play with my spreadsheets tonight and see how much (if any) change in the ultimate results is produced by variations in the correlation between bonds and the other assets. Maybe in this specific instance it really doesn't matter a hill of beans whether I use an index fund or an actively managed one, whether the correlation with equities stays pretty stable or varies all over the map.

 

[ziggy29]

I mean nothing negative about Mr Gross. He could be the best bond fund manager in the world and I'd still be worried, because this appears to be an actively managed fund, so I can't assume that its return, standard deviation and correlation with other asset classes are similar to those of an index fund. I am looking for an index fund because the standard deviation/return/correlation of the index is what I used in estimating the risk & return of my portfolio as a whole and choosing an asset allocation.

I guess the thought that comes to my mind here is, "don't let pursuit of the perfect become the enemy of the good enough."

 

[FinanceDude]

I mean nothing negative about Mr Gross. He could be the best bond fund manager in the world and I'd still be worried, because this appears to be an actively managed fund, so I can't assume that its return, standard deviation and correlation with other asset classes are similar to those of an index fund. I am looking for an index fund because the standard deviation/return/correlation of the index is what I used in estimating the risk & return of my portfolio as a whole and choosing an asset allocation. I started with apples and am concerned that if I switch to oranges in the middle of the process, the results will not be as expected.

You are way overthinking this. We are not talking about some hotshot Wharton grad that had a good year or two, we are talking about the "Warren Buffet: of bonds, whose a permabear and eked out a 5% return in 2008. There's probably not many index bond funds that can say that...........