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PIMCO Total Return Fund (PTTRX)

What Is The Fund’s Objective?

Simply stated, PIMCO Total Return Fund’s objective is maximum total return, consistent with the preservation of capital and prudent investment management. It seeks to achieve the aforementioned objective by investing, under normal circumstances, at least 65% of its total assets in a diversified portfolio of fixed-income instruments with varying maturities. Fixed-income securities primarily consist of bonds, debt securities, and other similar investment vehicles issued by various U.S. and non-U.S. public- or private-sector entities. The average portfolio duration of this fund typically varies within two years (plus or minus) of the Barclays Capital U.S. Aggregate Index.

How Does The Fund Meet Its Objective?

The fund invests primarily in investment-grade securities, but may invest up to 10% of its total assets in high-yield securities (“junk bonds”) rated B, or higher, by Moody’s Investor Service, Inc., Standard & Poor’s Ratings Services, or Fitch, Inc. If unrated, PIMCO will select bonds of comparable quality. It may also elect to invest up to 30% of its total assets in securities denominated in foreign currencies, and may invest beyond this limit in U.S. dollar denominated securities of foreign issuers. In addition, it may invest up to 15% of its total assets in instruments that are economically tied to emerging market countries. Finally, the fund may invest up to 10% of its total assets in preferred stock, convertible securities, and other equity-related investment vehicles. The “total return” sought by this fund consists of income earned on its investments, plus capital appreciation, if any, which generally arises from decreases in interest rates, foreign currency appreciation, or improving credit fundamentals for a particular sector or security.

How Has The Fund Performed?

The fund has performed consistently well since its inception in 1987, posting an 8.44% annualized return for its clients, which bests the Barclays Capital U.S. Aggregate Index, its benchmark. Average annualized returns for the trailing 1, 3, 5, and 10-year periods through 5/31/11 were, 8.13%, 9.27%, 8.93%, and 7.44%, respectively.

PIMCO Total Return Fund has been a top performer within Value Line’s Corporate High Quality objective group in seven of the last ten years. Notably, the fund outperformed its objective in the recent bear market, posting a gain of 6.8% between October 31, 2007 and February 28, 2009. The objective group lost 7.5% in that same span.

How Much Does It Cost To Own The Fund?

The PIMCO family of funds is, generally speaking, a load fund family. It offers front end, back end, and level loaded options of PIMCO Total Return Fund. There are also institutional shares available. The minimum investment requirement varies by share class, but can be as low as $1,000 for retail-oriented share classes and as high as $1 million for the institutional shares. The fund’s expense ratio has historically been in line to slightly below that of the Corporate High-Quality objective group.

What Type Of Investor Should Consider The Fund?

Investors with a more conservative, risk-averse approach, seeking to invest in a core fixed-income fund may be interested in this offering. The fund boasts a low beta (0.89), a solid dividend yield (3.5%), and consistent long-term performance, which makes it a good core-selection for a diversified portfolio. Moreover, investors also get a chance to own shares in a fund managed by industry giant Bill Gross whose strategies and management skills have held up during both prosperous and tumultuous market cycles.

That said, investors looking at this fund should be aware that they are purchasing manager Bill Gross’s investment philosophies, as much as the shares themselves. The fund has benefited from his acumen to date, but there is no guarantee that he will prove as successful in the future. Note, too, that the manager makes extensive use of derivatives. Gross has used these investment vehicles to handle the fund’s interest-rate exposure and invest in different sectors of the bond market because the overall size of the fund often makes the “old-fashioned” method of buying and selling bonds in the open markets difficult.
 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.