Should I replace PIMCO Income Fund with an intermediate-term Treasury fund?

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megaroth
Posts: 49
Joined: Sun Nov 30, 2014 2:08 am

Should I replace PIMCO Income Fund with an intermediate-term Treasury fund?

Post by megaroth » Tue Dec 04, 2018 11:46 am

Hi,

I prefer to hold fairly conservative investments (e.g., CDs, I-bonds, intermediate-term Treasury funds) in the fixed-income side of my portfolio. (On the equity side, I hold a mix of US large- and small-cap index funds and an international index fund - nothing exotic.) I'm not that fond of muni funds, but I'm in a high tax bracket in a high-tax state and have been running low on tax-advantaged space, so I've been amassing a fairly sizable chunk of munis (intermediate-term index fund with holdings across the US), and that will likely continue (calculated risk - they'd have to fall by a large percentage to overshadow the after-tax return advantage vs. Treasuries or CDs).

However...I do have one not-conservative (arguably) fixed-income holding in tax-deferred: PIMCO Income Fund (PIMIX). I've had this fund for many years. When I bought it, my thought was that it could add some diversification (e.g., international bond investments, mortgages) while still being relatively safe. Now, I'm wondering whether I should sell this fund and replace it with an intermediate-term Treasury fund (I prefer intermediate-term funds). Four factors are on my mind:

(1) I'm getting closer to retirement (few years out) and would like to get "safer" in general (e.g., moving to 50/50 vs. 60/40) for the next decade or so,
(2) the ER on PIMIX has risen from 49 bp to 74 bp recently,
(3) the fund is "black box" - it did OK in 2008, but the lack of a transparent strategy makes it hard to assess the nature and extent of risk it's taking on at any given time and how it might do in a future downturn, and
(4) I'm now holding a lot of munis (riskier than Treasuries/I-bonds/CDs), which has increased the risk profile of the rest of my fixed-income holdings (though I do plan to get out of munis once in retirement - I expect to be in a much lower tax bracket then)

Do you see any possible argument for keeping PIMIX in the mix (e.g., potentially beneficial diversification or some other consideration I'm not thinking of), or is this a no-brainer?

Thanks for your advice!

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Should I replace PIMCO Income Fund with an intermediate-term Treasury fund?

Post by Valuethinker » Tue Dec 04, 2018 12:14 pm

megaroth wrote:
Tue Dec 04, 2018 11:46 am
Hi,

I prefer to hold fairly conservative investments (e.g., CDs, I-bonds, intermediate-term Treasury funds) in the fixed-income side of my portfolio. (On the equity side, I hold a mix of US large- and small-cap index funds and an international index fund - nothing exotic.) I'm not that fond of muni funds, but I'm in a high tax bracket in a high-tax state and have been running low on tax-advantaged space, so I've been amassing a fairly sizable chunk of munis (intermediate-term index fund with holdings across the US), and that will likely continue (calculated risk - they'd have to fall by a large percentage to overshadow the after-tax return advantage vs. Treasuries or CDs).

However...I do have one not-conservative (arguably) fixed-income holding in tax-deferred: PIMCO Income Fund (PIMIX). I've had this fund for many years. When I bought it, my thought was that it could add some diversification (e.g., international bond investments, mortgages) while still being relatively safe. Now, I'm wondering whether I should sell this fund and replace it with an intermediate-term Treasury fund (I prefer intermediate-term funds). Four factors are on my mind:

(1) I'm getting closer to retirement (few years out) and would like to get "safer" in general (e.g., moving to 50/50 vs. 60/40) for the next decade or so,
(2) the ER on PIMIX has risen from 49 bp to 74 bp recently,
(3) the fund is "black box" - it did OK in 2008, but the lack of a transparent strategy makes it hard to assess the nature and extent of risk it's taking on at any given time and how it might do in a future downturn, and
(4) I'm now holding a lot of munis (riskier than Treasuries/I-bonds/CDs), which has increased the risk profile of the rest of my fixed-income holdings (though I do plan to get out of munis once in retirement - I expect to be in a much lower tax bracket then)

Do you see any possible argument for keeping PIMIX in the mix (e.g., potentially beneficial diversification or some other consideration I'm not thinking of), or is this a no-brainer?

Thanks for your advice!
1. given where bond yields are now, that's a material increase in costs in terms of hitting your returns

2. credit spreads got very tight - the market was giving little additional reward for taking on that extra risk. If they spread out again, then IT US Treasuries will do relatively well against bonds with credit risk. They will spread out again as and when the US moves into recession. There is however marginally more interest rate risk in the US Treasury fund (lower yields means more sensitive to interest rate changes).

Just to clean up the portfolio and reduce risk, I would do the switch.

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vineviz
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Re: Should I replace PIMCO Income Fund with an intermediate-term Treasury fund?

Post by vineviz » Tue Dec 04, 2018 12:28 pm

megaroth wrote:
Tue Dec 04, 2018 11:46 am
Do you see any possible argument for keeping PIMIX in the mix (e.g., potentially beneficial diversification or some other consideration I'm not thinking of), or is this a no-brainer?
I'd jettison the investment on expense alone, but it's especially hard to make a case for any diversification benefit. An active fund that can change strategies at will has a pretty good chance of zigging when you're counting on it zagging.

Virtually all investors a few years from retirement are best suited with mix of bond index funds: long-term TIPS, intermediate- or long-term Treasuries, intermediate or long-term municipals (if needed for tax-efficiency), and possibly currency-hedged international bonds.

But something like at total bond market fund is an absolutely reasonable alternative if you're trying to avoid complication.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

megaroth
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Re: Should I replace PIMCO Income Fund with an intermediate-term Treasury fund?

Post by megaroth » Wed Dec 05, 2018 11:28 am

Thanks to both of you - great points. I'm going to sell the PIMIX and replace it with VFIUX (Vanguard intermediate-term Treasury).

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Starchild
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Re: Should I replace PIMCO Income Fund with an intermediate-term Treasury fund?

Post by Starchild » Wed Dec 05, 2018 2:13 pm

megaroth wrote:
Wed Dec 05, 2018 11:28 am
Thanks to both of you - great points. I'm going to sell the PIMIX and replace it with VFIUX (Vanguard intermediate-term Treasury).
I own PIMIX for some time. It's a very large and diverse fund with nearly 7000 bonds and currently has a yield of over 5%. It also hasn't been hit as hard as total bond this year, and historically, has crushed it. I'm sticking with it myself as my core bond fund.

megaroth
Posts: 49
Joined: Sun Nov 30, 2014 2:08 am

Re: Should I replace PIMCO Income Fund with an intermediate-term Treasury fund?

Post by megaroth » Fri Dec 07, 2018 12:48 pm

Starchild wrote:
Wed Dec 05, 2018 2:13 pm

I own PIMIX for some time. It's a very large and diverse fund with nearly 7000 bonds and currently has a yield of over 5%. It also hasn't been hit as hard as total bond this year, and historically, has crushed it. I'm sticking with it myself as my core bond fund.
Thanks, Starchild - so true, and this is a big part of why I've kept PIMIX so long. It's done very well for sure, with a significantly higher return vs. Treasury or muni funds. My concern is that I don't know *how* it's been doing so well. The managers must be doing something different to get those returns. What bets are they placing, and how big are those bets? Will they make the right calls going forward? How big could the losses be if they're wrong? Until now, I've been OK not having answers to those questions. I figured that, at worst, this portion of my portfolio might behave more like equities, and since I was farther from retirement, I was OK with some gray area in my equity/fixed income asset allocation. But now, with retirement getting closer, I have a stronger interest in getting clarity on what risks I'm taking. In that sense, even my equity holdings are arguably less risky - I know (in general) the scope and nature of the risks associated with, say, a US large-cap or small-cap index fund.

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Starchild
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Re: Should I replace PIMCO Income Fund with an intermediate-term Treasury fund?

Post by Starchild » Fri Dec 07, 2018 5:05 pm

I hear ya and best of luck either way. Everyone has their own comfort level with all of this. I honestly feel that all investing is somewhat of a gray area for me. Who really knows what all these companies do to produce growth? Look at all this volatility. A lot of this is good faith that managers of all kinds here are doing things for the best. I'm sure PIMCO doesn't want lose money like any other business and understand their risks.

Time2Quit
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Re: Should I replace PIMCO Income Fund with an intermediate-term Treasury fund?

Post by Time2Quit » Fri Dec 07, 2018 5:14 pm

I have a large holding of PIMIX myself and thinking of adding more as well. I know there is no free lunch but I am drawn to the 5%+ yield. I looked at their holdings and a large portion are US treasuries. The ER is not so nice. If you do some backtesting it did fairly well in 08 and has crushed the bond index. Not sure what their holdings were in 08.

megaroth
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Re: Should I replace PIMCO Income Fund with an intermediate-term Treasury fund?

Post by megaroth » Sat Dec 08, 2018 3:58 pm

Time2Quit wrote:
Fri Dec 07, 2018 5:14 pm
I am drawn to the 5%+ yield.
Thanks for your thoughts, Time2Quit. I'm with you on the great yield, and when it turns out 10 years from now (when I might be ready to take on more risk again) that PIMIX has continued to do well, I'll probably regret missing out on the extra return. I'll just have to remind myself that the "sleep well" decision had peace of mind benefits as the tradeoff. :happy
Time2Quit wrote:
Fri Dec 07, 2018 5:14 pm
I looked at their holdings and a large portion are US treasuries.
True, which makes the outsized returns even more impressive - or maybe scary. How are they getting so much extra yield vs. an all-Treasuries index fund with just the portion of the portfolio that's not in Treasuries?
Time2Quit wrote:
Fri Dec 07, 2018 5:14 pm
The ER is not so nice.
Yes, and the recent 25 bp increase to 74 bp is one reason that I've taken a second look. All else equal, PIMIX now has to perform 25 bp better to provide the same return as before, which means the fund managers either have to get that much smarter or that much luckier (i.e., take on more risk). Another worrying factor.
Time2Quit wrote:
Fri Dec 07, 2018 5:14 pm
If you do some backtesting it did fairly well in 08 and has crushed the bond index. Not sure what their holdings were in 08.
It did do well in 2008, and that gave me some peace of mind, but as you said, it's not clear what they were holding/doing in 2008 and it's not clear now either, and it's also not clear that whatever strategy they're employing (whether same or different vs. 2008) would do as well in the next downturn, which might have different characteristics.

All that said, I hear you - PIMIX does have an impressive track record, which is why I held it for so long. I can understand why others continue to hold it. Maybe I'll take a fresh look at it in the future, when I might be less risk-averse.

Bodhi312
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Re: Should I replace PIMCO Income Fund with an intermediate-term Treasury fund?

Post by Bodhi312 » Sat Dec 08, 2018 5:38 pm

If you read the monthly updates (and other materials) on PIMCO’s page (for PIMIX), you might find more information than is often touted here about this fund. The managers do seem to understand that many of their investors aren’t huge risk takers and have been moving toward a defensive allocation for some time now.

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