The purpose of this article is to discuss PIMCO Strategic Global Government Fund (RCS) and how it compares to other funds and ETFs as an investment option. I recently wrote an article on PIMCO Global StocksPLUS & Income Fund (PGP) and had a reader bring up RCS, which is now on my radar. After a few days of researching the fund, I wanted to respond to his request and elaborate on this investment option.
RCS is managed by Allianz Global Investors Fund Management LLC, and the fund is comprised of high-quality, intermediate-term United States debt securities. The Fund may also invest in mortgage-related or other asset-backed securities, including mortgage pass-through securities and collateralized mortgage obligations, as well as non-US government and corporate debt. Currently, it trades at $11.40/share at the time of this writing and pays a monthly dividend of $.08/share. This translates to an annual yield of 8.42%. (recently a viewer expressed confusion as to how to calculate an annual yield. Divide the.08 by 11.40 and then multiply it by 12). This is a very attractive yield given the low rate environment, and is especially attractive because, as with many funds managed by Allianz, the dividends are paid monthly, which gives investors cash (or reinvested stock) at a much faster pace. Since the fund was started in1994, RCS has paid its dividend, along with a special dividend in December, since1995. This signifies a solid cash position and a willingness of the fund's management to maintain the dividend.
While RCS has a lower yield than PGP (around 10%), I already like this fund more for a few reasons. One, its beta is very low. The beta is currently .38 which indicates the fund is much less volatile than the market as a whole. This stability is what I, and many other dividend-focused investors, look for. PGP has a beta of 1.31, and many of my favorite ETFs, such as iShares Dow Jones Select Dividend (DVY) and SPDR S&P Dividend (SDY) have betas in the .08-.09 range. Presently, the Dow is down over 1%. Both DVY and SDY are down over 1% as well, yet RCS is down only half a percent. Low volatility funds make down days easier to handle, and the dividend allows wealth creation over time.
Another positive for RCS compared to PGP is the premium you pay for it. PGP trades at a premium to its NAV at almost 57%. This is very expensive, especially in comparison to RCS, which trades at a premium to its NAV, at just under 20%. While such a discrepancy, it seems clear to me that RCS is at least the safer option. Given its much lower beta and much lower premium, it hardly seems worth the risk to chase PGP's additional 2% yield.
It is important to note, while the fund's website does state it invests mainly in US government securities, the fund can allocate up to 20% of its assets into emerging market debt and securities. This exposes investors to international risk, both political and economic, given that emerging markets are some of the most volatile in the world. Currently, according to the fund's website, and as of 3/31/13, the fund has 4% of assets in emerging markets and 14% in non-US, but developed, government debt. This is relatively high, and investors may experience some turbulence given the ongoing credit issues in Europe and elsewhere.
Bottom line: every fund, stock, or ETF has some risk, and RCS is no exception. With its high reliance on government debt, in the U.S. and around the world, the fund is highly susceptible to public budgetary and credit problems. However, given its historically high dividend and commitment to maintaining it, low beta, and the continued trend of investors searching for high yield options, RCS should continue to do well in both the short and long term.