The California-based Pacific Investment Management Company, the world’s biggest manager of bond mutual funds, has done it again. Barely two months after the launch of its first exchange traded fund (the Total Return ETF BOND) the fixed-income fund goliath has just launched its second offering. This time PIMCO will help investors protect their investments against inflation through its Global Advantage Inflation-Linked Bond Strategy Fund (ILB).
You should note, however, that this fund cannot and will not use derivative instruments such as forwards, futures, options and swaps to maximize returns, a strategy successfully employed by Bill Gross over the years for his MF products. The fund is an actively managed product that invests in high-quality inflation linked bonds covering both the emerging and the developed worlds.
The only drawback of this investment strategy is that you may have to accept a lower yield for protection against inflation. Since these are sovereign bonds backed by governments, there’s virtually no default risk (hard to believe when looking at Europe), which explains the comparatively lower return. If you are seeking higher returns, and are willing to accept greater risk, this may not be the ideal solution.
ILB is an actively managed fund unlike its TIPS ETF peers, which are passively managed. It can also be treated as a benchmark for inflation-protected bonds since it includes both emerging and developed market bonds.
PIMCO will hold bonds of specific countries based on its view on inflation expectations and currency strength while taking into consideration both maturity and duration. The fund will also track a GDP based secondary index consisting of the fastest growing economies rather than maintain holdings based on a more traditional market-cap weighted systems.
That being said, US securities are expected to constitute over 85 percent of the portfolio while the UK, Mexico, Brazil and Australia are the other top holdings. The fund has exposure in 38 different securities with a relatively low duration of a little over seven years.
No yield data is currently available on ILB due to the newness of the fund, but passively managed similar funds have posted about 4.2 percent annual returns.
The expense ratio is estimated at 0.60 percent after waivers while total AUM remains less than $20 million. ILB’s true competition in this segment is from the iShares Global Inflation-Linked Bond Fund (GTIP) which holds both domestic and international securities.
GTIP tracks the BofA Merrill Lynch Global Diversified Inflation-Linked Index, a benchmark of bonds from around the world and charges 0.40% in annual fees, though it’s a passively managed fund. With its unique investment strategy, PIMCO’s ILB may well become the trend setter in this new investment category.
Disclosure: No holdings