Ballooning Assets at PIMCO Income Give Us Pause

Eric Jacobson: There's no question that PIMCO Income has been truly impressive. The fund boasts a world class team, an effective, time-tested process, and a stellar record. The strategy's assets have grown at an astonishing rate, though, which partly explains why its Morningstar Analyst Rating is Silver rather than Gold.

Assets in the overall strategy--in other words, assets across the small handful of vehicles PIMCO manages the same way around the globe--dipped a little in May, but have otherwise ballooned over the past couple of years. They stood at more than $207 billion at the end of May, having more than doubled since the beginning of 2017.

That gives us some pause because it will eventually make it more difficult for the fund to benefit as much from the kind of sector and security level bets--particularly among nonagency residential mortgages--that have helped the fund shine so brightly over the past several years. That sector has some truly unique positive traits given how beaten down it was after the financial crisis.

PIMCO has done a really good job thus far at keeping up their allocation to the sector in the fund even as it has gathered so many assets; they comprised roughly 30% of the portfolio at the end of May. But the sector is shrinking because there’s been very little new issuance.

We think investors would be better off if PIMCO were to think about closing the fund, even temporarily at some point, if they begin to find it too difficult to keep the portfolio's nonagency mortgage stake at a level they like. PIMCO disagrees, though, arguing that the fund's massive global opportunity set will continue to give them plenty of choices to keep generating great returns.

The bottom line, though, is that we still think this is a great fund, with great resources, and great managers.