A Very Nice Unconstrained Bond Fund
But The 12% Yield Probably Isn’t Sustainable
Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
With the exception of 5% yielding T-bills and maybe junk bonds, the fixed income market still hasn’t been terribly kind to investors. Yields are still drifting higher, especially on the long end of the Treasury curve, and the flight to safety has mostly failed to show up despite a crumbling real estate market, bank downgrades and warnings from retailers. With so much uncertainty surrounding the path of the global economy, a diversified approach to building the income-producing sleeve of your portfolio might be best for now at least.
The PIMCO Income Strategy Fund (PFL) does just that. Run by one of the biggest names in the closed-end fund space, it offers exposure to varying credit types, qualities and regions of the world. In a market where you really need to pick and choose your opportunities, taking a high level approach and diversifying away as much risk as possible is worth considering.
Fund Background
PFL employs a multi-sector approach and seeks high current income consistent with the preservation of capital. It invests in a diversified portfolio of floating and/or fixed-rate debt instruments and maintains the flexibility to allocate assets in varying proportions among floating- and fixed-rate debt instruments, as well as among investment grade and non-investment grade securities. It may focus more heavily or exclusively on an asset class at any time, based on assessments of relative values, market conditions and other factors. The fund’s duration will normally be in a low to intermediate range. It also utilizes leverage in order to enhance yield and total return potential.
Unconstrained bond funds can be both good and bad. On the plus side, they can literally scour the entire fixed income market to target and invest in the best opportunities available. On the flip side, they can also be a “jack of all trades, master of none”. These funds generally maintain a more diversified approach at all times even if they have a high conviction opinion of just one segment of the market. If you’re looking for targeted exposure within a specific area, you might be better served looking elsewhere.
Even though junk bonds comprise the largest chunk of this portfolio, it’s not the majority position. Roughly 43% of the fund consists of non-investment grade and unrated bonds. While there is a modest allocation to government and agency securities, this is mostly a corporate bond fund, so PFL should probably be treated as such. Overall, however, this still qualifies as a well-diversified portfolio given its global exposure and mix of maturities.
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