Here's some good news for investors who have been trying to figure out what to do with their fixed-income money in the face of rising interest rates. Pimco Canada recently launched two bond-based exchange-traded funds that are well worth considering.
California-based Pacific Investment Management Co. is widely regarded as one of the world's leading bond traders. It has operated a suite of mutual funds in Canada for several years but only entered the ETF market in October with two offerings.
One is the Pimco Monthly Income Fund (Canada), ticker PMIF. It's an ETF version of the Pimco Monthly Income Fund. The fund and the ETF are managed by Dan Ivascyn, Pimco's managing director and group chief investment officer, and Alfred Murata, managing director and portfolio manager.
The fund invests in an international portfolio of high-quality, non-Canadian dollar, sovereign and corporate bonds. About 55 per cent of the fund is in U.S. issues, 11 per cent in Canada, and the rest distributed worldwide. Most assets are in developed countries; however there is a small percentage of emerging markets assets in the mix. The average effective duration of the fund is 2.95 years.
The fund has never recorded a losing year since it was launched in 2011.
The five-year average annual compound rate of return to Oct. 31 was 6.39 per cent. The six-month gain was 2.87 per cent, an excellent showing during a period of rising interest rates.
The October distribution from the mutual fund was 4.09 cents a unit, bringing the one-year total to 89.477 cents, including a year-end 2016 distribution of about 40 cents a unit. At a price of $14.40 per mutual fund unit, the one-year yield was 6.2 per cent.
However, the large year-end distribution in 2016 distorts that figure. Basing the yield on the current monthly distribution gives us a figure of 3.4 per cent.
The A units of the mutual fund have a management expense ratio (MER) of 1.39 per cent.
The ETF has a management fee of 0.75 per cent, which suggests an MER of around 0.80 per cent to 0.85 per cent when all costs and taxes are factored in.
That is a significant cost differential and suggests that the ETF should, over time, generate a return that is about half a percentage point higher, on average, than the A units of the mutual fund.
However, if you have a fee-based account, you should be holding the F units of the mutual fund. They have an MER of 0.83 per cent, so there would be no cost saving in switching to the ETF.
The ETF began trading at $20 and has not moved much off that mark during the short time it has been on the market. The units closed on Nov. 27 at $20.12.
The ETF makes monthly distributions, with the initial full month payment in November of 3.25 cents a unit.
If maintained at that rate, the annual distribution would be 39 cents, which would translate to a yield of 1.9 per cent. That's a lot less than the mutual fund. However, even though both the mutual fund and the ETF are based on the same pool of assets, Pimco says there is a difference in the way distributions are calculated. That means the cash yields may not be the same, although the total return between the F units and the ETF should be similar.
The second ETF being offered is the Pimco Investment Grade Credit Fund (IGCF). It is based on the mutual fund of the same name that focuses primarily on U.S. corporate bonds. Manager Mark Kiesel uses a top-down, bottom-up approach with valuation screens to identify what he believes are the most attractive opportunities in global credit markets.
The latest one-year return was 5.1 per cent, very good in this difficult bond market.
The fund is more diversified than the Monthly Income Fund/ETF, with almost 10 per cent of the assets in emerging markets and 8.5 per cent in high-yield credit.
The distributions are about half the level of the Monthly Income Fund, at about 2 cents per unit a month.
The ETF will have a management fee of 0.75 per cent, which suggests an MER in the range of 0.80 per cent to 0.85 per cent.
I like both of these ETFs, but for income investors my preference is the Pimco Monthly Income ETF because of its higher cash flow and its longer history.
Here's a summary.
Pimco Monthly Income Fund (Canada)
- Risk rating: Moderate risk
- The security: This recently launched ETF is based on a mutual fund of the same name that has been in existence since January 2011.
- Why we like it: At a time when most bond funds are struggling to break even, the mutual fund on which this ETF is based is generating good returns. Another big attraction is cost. (As mentioned, there is no cost advantage if you own F units of the mutual fund version.)
- Highlights: The managers have an explicit mandate to avoid concentrated risk. Bonds ranked below investment grade are limited to no more than 50 per cent of total assets.
- Risks: Although the managers have done an excellent job at a time when interest rates have started to move up, the current climate is negative for bonds in general. Just because the fund has not lost ground up until now doesn’t mean that can never happen. Investors should keep that in mind before making a commitment.
- Distribution policy: Distributions are paid monthly. Given the newness of the ETFs, the long-term distribution rate has yet to be determined. However, it is expected to be stable and comparable with the mutual fund.
- Who it’s for: This ETF is suited for investors who want some global bond exposure and good cash flow.
- How to buy: The units are listed on the TSX. Trading volume can be thin at times, so place a limit order and be patient.
- Summing up: Pimco is a highly respected name in the bond industry, and this ETF should be a good choice for income investors.
Disclosure: I own units in the Pimco Monthly Income mutual fund.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca. Follow Gordon Pape on Twitter at twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney