PIMCO Total Return Class A (PTTAX)

By Ian Wyatt, MutualsAdvisor.com | PTTAX | Jun 02, 2008 | comment

By Ian Wyatt, Editor-In-Chief

 Jason Cimpl, Research Analyst

 Ann C. Logue, Research Analyst

Fund Type:  Intermediate-term Bond

Expense Ratio: 0.90%

Sales Load: 3.75%

Yield TTM: 4.49%

Min. Investment: $5,000

Web: http://www.allianzinvestors.com

Top 3 Holdings:

FHLMC.

US Treasury Notes.

FNMA.

With the bond market in unprecedented turmoil, more investors are turning to the nation’s largest bond fund, PIMCO Total Return. Steered by Bill Gross, a three-time Morningstar Fixed Income Manager of the Year, the fund has avoided the sub-prime mortgage melt down that has affected so many bond funds, beating both its benchmark index and peer group funds handily during 2007 and the first three months of 2008.

That’s no surprise, given Gross’ track record. As the founder and CEO of PIMCO, Gross has steered the fund since its inception in 1987 and is widely hailed as the leading authority on the U.S. bond market. The fund’s long-term track record is just as impressive as its recent performance: on a year-over-year basis, the fund has outperformed its benchmark index every year except one since 1997. On an average annual return basis, the fund has bested its peers and its benchmark indexes on a 10-year, five-year and three-year average annual return basis. It doesn’t get much better than that.

Gross was prescient in spotting the coming of the sub-prime mortgage debacle and its impact on mortgage-backed securities. He positioned the fund out of lower quality sub-prime mortgage assetbacked securities and lower-rated corporate bonds. Those moves helped the fund sidestep the carnage.

But that’s not all that Gross accomplished: his moves into foreign bonds, higher quality debt and municipal bond debt enabled the fund to gain 10% during the past year. In a bid to extend the fund’s strong performance, Gross is targeting higher maturity bonds so the fund can profit from potential declining interest rates around the globe. The fund is also overweighting high quality mortgage-backed securities, adding to its positions in Asian and emerging market debt and maintaining a focus on higher quality issues.

Gross’ strategy stems from PIMCO’s investment process, which begins with a long-term forecast on global economies and interest rates. Moving from this macro perspective, managers and analysts meet quarterly to apply the overall forecast to the markets during the upcoming three to 12-month periods. These sessions shape the fund portfolio by setting parameters for fund duration, sector weightings, credit quality and maturity structure.

The fund’s core investing strategies revolve around a value-added approach that includes cost-effective trading, proprietary quantitative analysis, individual issue selection and sector rotation. With offices in Newport Beach, Calif., London, Munich, Singapore, Sydney and Tokyo, the firm has a deep bench of managers and analysts.

Currently, the fund’s average credit quality is at AA, a notch below the highest quality AAA. Gross has recently increased the amount of assets invested in AAA-rated bonds, which make up 66% of the portfolio, while decreasing weights in AA- and A-rated bonds. Only 12% of the portfolio is composed of bonds with a credit quality lower than A and only 3% invested in high-yield, or so called “junk” bonds.

In terms of sectors, the fund has 62% of its assets in mortgagebacked bonds, 12% in investment grade credit securities, 5% in emerging market bonds and 4% in non-U.S. developed market bonds. Cash and cash equivalents make up nearly a quarter of the portfolio.

The fund’s average portfolio duration is 4.25 years. Duration is a measurement of the overall fund’s sensitivity to interest rate changes and ranges between two to 10 years. Funds with lower duration are less sensitive to interest rate changes, while funds with higher durations are more sensitive to interest rate changes. Management has shortened the fund’s average duration since the end of 2007, but it is still a bit below the fund’s benchmark index, the Lehman U.S. Aggregate Bond Index, which is 4.28 years.

Distributed by Allianz Investors, the fund is principally sold through financial advisors. The A-class shares carry a 3.75% front-end load, which is deducted from the amount you invest to compensate your financial advisor for investment counseling. The sales load is reduced as more funds are invested. If you invest between $100,000 to $249,000, the sales load is reduced to 3.36%; between $250,000 to $499,999, 2.3%; and at $500,000 to $999,000 to 1.78%. For amounts invested over $1 million, there is no front-end load, but a back-end load may be assessed if shares are sold within 18 months of initial purchase.

The fund’s 0.90% expense ratio is slightly below its peer group average of 0.96%, according to fund data tracker Lipper. Of that 0.90%, .25% is an advisory fee, 0.25% is a distribution and service fee and 0.40% is an administrative and management fee.

 This article is from the report, "MutualAdvisors.com, Top 10 Mutual Funds from 2008." Click here for the latest report!

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