PIMCO Total Return Fund Performance Helped By U.S. Agency Mortgages

Mar.27.12 | About: PIMCO Total (BOND)

The performance of the PIMCO Total Return Fund (TRXT) has been good over the last year, rising in value almost 4.51%. This does not include any interest payments made over that time, which would drive the total return to around 6.45%. In February, the fund was yielding 2.64%, net of fees, on an annualized basis.

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The PIMCO Total Return Fund did better than 95% of similar funds over the last month and in the two-month time period since Dec. It underperformed the average fund in its Morningstar category by 1.01% in the last 12 months. The fund did 1.69 percent worse than the benchmark Barclays Capital US Aggregate Index during the same period.

Performance and Positioning Summary from their February Report

Contributors to February Performance:

  • An overweight to US Agency mortgages as returns outperformed Treasuries.
  • In corporate bonds segment, more focus on financial companies helped since they outperformed the general corporate market.
  • Modest exposure in debts of emerging markets as spreads tightened.

Detractors from February Performance:

  • Rising Treasury yields as underweight to US duration.
  • Rising yields in Canada affected interest rate exposure in the country.

An overweight in US Treasuries affected the performance as 10-year note yields rose 17 basis points to end the month at 1.97 percent. This reflects in the fund's effective duration reading which fell to 5.68 years in Feb. from 6.33 years in the prior month. Effective Duration measures percentage change in value for one percent change in yields. Benchmark duration rose marginally to 4.94 from 4.86 during the month, so the average maturity of the bonds held by the fund was slightly longer than the benchmark.

US government related securities holdings declined marginally to 38 percent from 41 percent in Jan. Holdings of Mortgage related securities, especially MBS, went up by 2 percent during the period. An overweight to Agency MBS added to performance. Holdings of commercial mortgage-backed securities remained unchanged for the month. Bonds of financial companies added to returns as financials outperformed the overall corporate market and like-duration Treasuries.

Interest rate exposure in Canadian securities dragged performance down as Canadian 10-year yields rose during February. However, a steepening yield-curve bias in the US helped performance as 30-year yield climbed 15 basis points. As interest rates rise, longer maturity bonds drop a higher percentage in price compared to short-term securities. Investors expecting a rate hike thus swap long maturity bonds with short ones, thus driving prices up (due to greater demand). Conversely, prices of long maturity bonds drop (due to excess supply), driving yields up.

Exposure to emerging market local interest rates, especially Brazil, helped returns, as interest rates dropped.

Disclosure: I am long TRXT.