Saturday, August 29, 2009

If Your GDP Outlook Is Dim, Try Pimco

Investors who expect the next several years of GDP growth will be anemic at best, with an underperforming stock market to match, will find Pimco Total Return(PTTDX Quote) one of the best places to find positive returns. That also means it's a good choice for investors looking to park their fixed income allocation.

On Aug. 18, Pimco adviser Richard Clarida said he expects 2% GDP growth in the U.S. with high unemployment for some time. In his August outlook, Bill Gross says that he expects much slower GDP growth in the future.

In the readjustment process, debts take a haircut via corporate defaults and home foreclosures, and equity P/Es are cut based upon increased risk and substantially lower growth expectations. A virtuous circle of expansion turns into a vicious cycle of recession or low-growth stagnation.

Anyone following Gross' line of thinking knows what this means: Protect your capital and accept lower rates of return if it means reducing losses on assets. High-risk funds often carry high fees, but if Gross is correct, those funds will be unable to deliver high returns. In a lower return world, volatility will likely be lower as well, and high fees will chew up a greater percentage of investors' assets.

In Gross' August outlook, he says of mutual fund expenses, common sense would dictate that the industry as a whole cannot outperform the market because they are the market, and long-term statistics revealing negative alpha for the class of active managers confirms it. Yet, what a price investors are willing to pay!

Many of Pimco's own funds charge fees in the neighborhood of 1%, with Pimco Total Return charging 0.75% and the A class (PTTAX) charging 0.90%. The R class (PTTRX) charges 0.45%, which is nice if you can get it in your retirement account. Another option is Harbor Bond(HABDX Quote), which is advised by Gross but has only a 0.55% fee.

A yield of more than 5% makes the fund an attractive income source in a world of low yields, but it also delivers capital gains. PTTDX (returns will be slightly higher for PTTRX due to lower fees) gained 4.5% last year, when many bond funds finished down for the year. In the past 10-years, it gained an annualized 6.95% (through July 31), besting both its comparison benchmarks. The three- and five-year annualized returns were 8.24% and 6.10%, respectively. In the past year, it has gained 11.42%, which places PTTDX in the top 6% of all funds in its category, high quality intermediate term bonds. Year to date, PTTDX is up 9.28%, more than 5% better the benchmark.

High yields are out there, but the risks of default are high. Index funds with mortgage or corporate exposure could suffer losses if the economy remains weak. Protecting investor capital is job number one and Pimco Total Return has a proven track record.

(from, August 24, 2009)

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