"We've added two bond fund's to our buy list: PIMCO Total Return (PTTDX) and Loomis Sayles Bond (LSBRX)," says Mark Salzinger.
The editor of The No-Load Fund Investor explains, "We favor both funds for many of the same reasons: both have experienced, top-flight management supported by robust credit-research staffs." Here's his review.
"Both bond funds have performed strongly over the long-term and during recent market turbulence. And each has a relatively open mandate that allows their respective management teams the flexibility to scoop up attractive bonds from diverse sectors of the bond market in pursuit of both capital appreciation and income.
"PIMCO Total Return is the world's biggest bond fund, and second large mutual fund of any stripe, with $128 billion in assets. The fund's popularity is a product of the outstanding track record and enormous reputation of its manager, Bill Gross. Its 10-year annualized return of 6% puts the fund in the top 5% of all intermediate-term bond funds over that time.
"PIMCO Total is a reliable core bond fund holding for most any investors. Gross' approach is both deliberate and opportunistic. He builds the portfolio around PIMCO's macroeconomic outlook, which is developed on a firm-wide bases and looks out three to five years.
"This outlook is honed and refined quarterly, and specific shorter-term impacts to interest rates, credit and economic factors are considered and used to shape individual security selection.
"The fund invests mainly in investment grade bonds of intermediate maturity. That means it typically does not make significant interest rate bets. Despite this moderate sensibility, Gross has made several moves that should bolster returns.
"One, PIMCO Total Return has avoided Treasuries and TIPS, which Gross thinks provide poor protection from inflation at current levels. The fund has also benefited from exposure to foreign interest rates and currencies, especially the euro and emerging markets currencies.
"Gross has stated his preference for the 'compelling value' of high quality mortgages, which have attractive yields relative to Treasuries. Mortgage related securities make up nearly two-thirds of the portfolio.
"And, the fund has emphasized short duration (that is, lower interest-rate sensitivity), as evidenced by the portfolio's low duration of 4 years relatives to the Lehman Brothers Aggregate Bond Index duration of 4.5 years.
"Loomis Sayles Bond is co-managed by Dan Fuss and Kathleen Gaffney. The $17.9 billion fund is run in a 'go-anywhere' fashion, and they are not afraid to make significant bets on interest rates or sectors of the economy or the bond market.
"Their portfolio's broad reach makes it reasonably well-diversified, though, and an able core bond holding despite its harder-charging approach.
"Performance has been outstanding. The fund's 10-year annualized return of 8.5% outpaces the Lehman Brothers Aggregate Bond index by 2.7% annual, an enormous disparity in bond returns.
"The fund's performance over the past year has been solid (4.1% return) but has lagged the broad index and more conservative peers, owing to its narrow holdings of Treasuries, whose prices soared earlier this year as risk-averse investors fled from even high quality assets to Treasuries.
"The fund's average maturity (recently 13.8 years) and duration (7 years) expose it to significantly more interest rate risk than PIMCO Total Return. However, the managers favor securities that have low correlations to the broader bond market and less sensitivity to fluctuations in interest rates.
"Strong research capabilities allows Fuss and Gaffney to identify securities they believe to be undervalued, and the fund's broad mandate allows them to invest wherever such opportunities arise.
"As such, the portfolio is eclectic; it reflects the managers' favorite ideas. While we are impressed with Fuss and Gaffney's long-term record and apparent managerial acumen, much of the fund's appeal to us stems from its current positioning, with major stakes in investment-grade corporate and high-yield bonds."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
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Reader Comments (Page 1 of 1)
8-06-2008 @ 8:59AM
Steve Selengut said...
Good News For Income Investors
Looking for good news in today's markets is like searching for the proverbial needle in a haystack. Needless to say, practically all investment grade equities and nearly all closed end funds that specialize in providing regular recurring monthly income have been reduced in market value by this prolonged correction. The quake has spread in all directions from its financial epicenter, and the mounting doom and gloom has taken its toll on even the most rational investment decision makers. Try to keep in mind that the purpose of income investing is the income that your portfolio produces not an increase in the securities' market values---
So here's the good news (and for anyone with a 40% or higher income asset allocation, or an income portfolio being used for living expenses), it really is very good news. Base income levels, from the beginning of the stock market correction in June '07 until mid-July '08, have barely changed at all. In fact, they have probably risen in properly asset allocated portfolios. I have examined the regular recurring monthly income distributed by 56 taxable income CEFs and 61 tax-free income CEFs, and the conclusions are pretty remarkable.
In spite of the fact that the vast majority of my favorite monthly income producers are lower in market value than I would like, the amount of income they are distributing to shareholders has not moved lower meaningfully--- even though the Federal Reserve has reduced interest rates by approximately 60% during the past twelve months. Here are the numbers: (1) 48% of the taxable-income CEFs are distributing precisely the same amount per share as they did a year ago. Fourteen issues have increased their payouts and fifteen have reduced them.
The net result is a decrease of just fourteen cents (2.5% of the total monthly payout). The average current yield on the portfolio, as of mid July '07, is 9.86% without considering any capital gains distributions. Additionally, the group is selling at market prices that reflect an average discount of nearly 11% from NAV. Is that special or what? The bonds, preferred stocks, government securities are priced 11% below their current market values.
(2) The numbers are similar with regard to the 61 tax-free income CEFs: 46% have not altered their payout over the past twelve months; eighteen have reduced their payout slightly, and 15 have increased the monthly dole. The net difference for the group over the past year is less than one cent, or a percentage change of two-tenths of one percent. Remarkable. This group is selling at an average discount from NAV of 9.1% and has a current tax-free yield of 5.51%.
(3) Of 117 individual issues, about half have produced stable income. The others have accounted for a total payout reduction of less than 15 cents--- a measly 1.7%. Why is this amount of little consequence? Two reasons really.
First of all, a properly asset-allocated income portfolio does not disburse all of the base income it receives, so there is income available to reinvest in more shares of income producing securities. This process assures a growing cash flow to calm your fear of rising prices. The other reason is a bit more hypothetical. The Fed has lowered rates significantly, a process that normally produces higher prices for income securities. Eventually, those lower interest rates (even if global pressures convince politicians to take back some of the reductions) should produce higher prices (i.e., profit taking opportunities) in these securities.
Admittedly, even if your asset allocation has been fine tuned for years, lower portfolio market values in this area make stock market valuation shrinkage feel even worse. But the value of stable cash flow becomes painfully clear for investors who misguidedly depend on capital gains for their spending money. Properly asset allocated portfolios contain enough base income generators to pay the bills. The purpose of capital gains is to produce proportionately more base income generators.
The purpose of this email is simply to bring some needed sunlight into an investment environment that is far gloomier than I think it needs to be. If you want the details, you'll have to request them personally.
Steve Selengut
http://www.sancoservices.com
http://www.kiawahgolfinvestmentseminars.com/
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"