There’s No Way This 11% Yielder Deserves This Kind Of Premium
Sometimes it’s best to spread out your bets.
Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6% 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.
After 2022’s bond market debacle, the fixed income space remains challenging, but for different ways. If last year was all about trying to find ways to protect yourself from a sharply rising interest rate environment (there weren’t any), this year is about being selective in finding opportunities now that the Fed’s rate hiking cycle is nearing an end. I’m still a proponent of U.S. Treasuries in this environment, but I think we need to get past the Fed’s influence on the yield curve before their true value can be unlocked in a stronger risk-off move. Junk bond spreads are still incredibly low, so there’s plenty of downside risk in that group should conditions turn. Even investment-grade corporate credit could take a hit as recessionary conditions progress. Just how should income seekers approach this market?
Sometimes it’s best to spread out your bets. Instead of trying to target specific winners and risk being wrong, invest in all corners of the bond market in order to capture a wide range of performance. Plus, you get the benefit of risk diversification in the process. That’s what the PIMCO Strategic Income Fund (RCS) aims to do. It targets income-producing securities from all segments of the market from all around the world to try to generate an above average yield while limiting interest rate risks. It’s a strategy that makes some sense given where the markets could be headed next.
Fund Background
RCS has high income as a primary objective and capital appreciation to the extent consistent with this objective. The fund normally invests in a combination of income-producing securities of U.S. or foreign governments, mortgage-related and other asset-backed securities, corporate debt obligations, and other income-producing securities of varying maturities, including emerging market issuers and municipal securities. The fund also utilizes leverage in order to increase yield and total return potential.
RCS has relatively good size and liquidity. Its nearly 30 year history will give us a good sense of how the fund has performed in multiple market environments. The big attraction as far as I can see here is the diversity. You’re spreading your bets across multiple asset classes and broadening your fixed income exposure in what appears to be a challenging environment ahead. The 1.44% total expense ratio is at least comparable with other bond funds using leverage, even if it is still on the high side, but the 36% leverage overlay is a bit concerning. This is the area where leverage is often costly and investors don’t get the appropriate bang for the buck.
If you dig into the portfolio composition, you’ll immediately notice that RCS is heavily invested in mortgage-backed securities.
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