The PONDX freight train keeps powering ahead. Is a wreck dead ahead?

Hiyield007

Down to 59% in junk bonds (MNHYX) The rest is in ....., ....., and ...... I assume the strength in PONDX is due to its exposure to residential mortgage backed securities?? Seems like everyday there is a new mini-bubble article on the junk bond market. I guess that is good as markets usually flame out when everyone is in love with them not when fear is on the rise. Junk bonds as per the Merrill Lynch High Yield Master II Index (the proxy for junk bonds) has seemingly hit one new all time high after another since the end of June. Lots of areas in bondland seem extended but will let price take me out, not fear or the opinions of others. Price, as in a percentage decline off recent highs.

bee

Hi Junkster,

Every time mortgage rates are eased by the Fed's (buying of MBS) older dated MBS become more valuable as well as being higher yielding than what the Fed is willing to buy. This is great for new home buyers, for banks willing to work out a deal with an underwater homeowner and for funds like PONDX.

PONDX seems well position for the next round of easing and I might also include REIT funds as beneficiaries of the Fed action. The Feds seems to be focused on helping housing and banks get back on their feet.

To me, this strategy possesses a potential multiplier effect for job creation and economic growth but has to be done slowly. If....when rate reverse a fund like PONDX will still hold a variety of MBS maturities which should help mute a sudden reversal of rates.

Also, at that time I am hoping management (at PIMCO, Doubleline, MetroWest etc.) are smart enough to know that a new set of strategies is needed to keep the Income flowing.

andrei

If I understand correctly, this fund is 150% invested, i.e. strongly leveraged. See the portfolio in M*. In other words, while DBLTX and MWCRX have 20% of the money in cash, this one borrows 50% of the money in cash, and invested it in bonds, so it is almost twice as aggressive as DBLTX in this respect, and has longer duration.

Does it concern you at all, or you trust the manager?

Hiyield007

Thanks bee, nice cogent comments. Without getting too political, I feel Romney would be good for equities and Obama bonds. That recent selloff in Treasuries many said was the Ryan effect. For better or worse depending on your political persuasion, Obama represents stimulae, bailouts, and low interest rates.

Andrei, I never marry a fund and exit a small percentage decline from any recent highs. Sometimes they just keep declining while other times I have to jump back in. I am one of those dreaded "timers" from the 90s albeit never try and time per se but simply jog along with the trend.

hank

Don't know what they got in the tank. Running 2-3% better on average than my PRHYX over 1 & 3 year periods. Good for you!

bee

Reply to @andrei:

Isn't this Pimco's derivative strategy? A couple of references:

"Derivatives have been used as an integral part of PIMCO’s strategies since 1980. It primarily uses these instruments to manage risk and take advantage of market inefficiencies. It does so by adjusting the fund’s interest rate and yield curve exposures and as a substitute for physical securities. Table 1 compares performance of accounts that allow futures to those that do not. It indicates that PIMCO adds more value with some consistency when using futures."

http://county.milwaukee.gov/ImageLibrary/Groups/cntySupervisors/cntybrdspecialcommittees/2009/Update_on_PIMCO_Total_Return_Fund__July_2009_.pdf

mnzdedwards

Reply to @andrei:

Regarding the 150% investment, I often double check portfolio stats from Morningstar by going directly to the fund company. Below is a link to Pimco Income's Portfolio as of 7/31/12. Click on "Portfolio" after following the link.

http://investments.pimco.com/Products/pages/314.aspx

I don't see anything that suggests that they are leveraged from the Pimco website.

Perhaps their outperformance has to do with their large foreign and EM bond stakes?

Happy shareholder!

Mike_E

hank

Reply to @Hiyield007:

"... Obama represents stimulae, bailouts, and low interest rates." -

Yep - but look who he followed )-: (DJI = 7949 beginning of Obama's Presidency)

catch22

Okay, PONDX is cruising along using some fancy tools. Not that others don't also have the tools; but that PONDX has either been lucky with the calls and timing, or that they (mgmt.) are very good at this point.
A quick check and a fairly good recall indicates that DBLTX is currently (July, 2012) about 80% in mortgage issues; but just a month or so backwards was at about 60% mortgage issues with most of the balance in Treasury and Corp. issues. DBLTX has favored the mortgage area; as I recall this is Mr. Gundlach's favored knowledge area.

YTD's for a few related bond pieces:
MBB = + 2.1%
VMBS = +2.6%
LQD = + 8.1%
IEF = + 4.5%
TIP = + 5.3%
Fidelity's two related funds in the mortgage area are slow movers, too; so far this year.

From what I have followed through the year so far, is reflected above; and in particular, that most mortgage funds have been on a slow path forward versus other bond sectors.

If DBLTX remains more into the mortgage area, I would expect to find a reaction to the 80% exposure to the mortgage area to be reflected in the fund's pricing beginning Aug. 1. Prior to this date, some of the boost for this fund may have come from larger holdings in Treasury and Corp. issues. DBLTX is not being a dog by any means, and if the current path of growth would remain, a year long holder of the fund could be looking at about 10% by Dec. 31. If that ain't good enough for most folks, well..............call a hedge fund manager, I guess; and ask to view their record book.

Just a few late night brain farts.

Take care,
Catch

Hiyield007

Here's some insight into how the manager of PONDX is structuring his fund.

http://www.moneynews.com/InvestingAnalysis/Gross-Pimco-Bond-King/2012/08/29/id/450230

Charles

Nice Hiyield. I suspect bee is beaming on this one. Thanks for sharing.

bee

Reply to @Hiyield007:

Thanks for this article as well. Like any investment...keeping an eye on the cook and the ingredients in the stew is an ongoing process.

I've owned too many investments that turned out stinkers to get too excited about one success but; like my inconsistent golf game, it keeps me wanting to play another round.

Right now PONDX is one of my favorite clubs.

gariem

PIMIX/PONDX outperformed all my equity and bond funds today, up 0.56%. I'm with bee on this one!

gariem

PIMIX/PONDX outperformed all my equity and bond funds today, up 0.59%. I'm with bee on this one!

Hiyield007

I was more than thrilled when I saw today's prices. Everything in bondland outside of Treasuries was on fire (junk, emerging markets, RMBS) with PONDX being my best % gainer. I'm about 30% there and should be higher but see no need to ride myself of anymore junk bonds until they turn lower. I still like MWCRX but have only around 5% there. It's a slow, but very consistent plodder upward. My other smallish holding around 5% is TGEIX. I would love to have been in ANGIX but thought it had a 1 million minimum which would have messed up my other bond allocations especially junk. Plus, it's very similar to PONDX in its emphasis on RMBS. Now I find out it's available at where I trade (Scottrade) for no mimimum.

Hiyield007

This freight train has actually picked up speed along with its brother ANGIX. And MWCRX is finally picking up some stream. And junk just keeps chugging along. If this keeps up, this long time Barry Goldwater Republican may have to actively begin campaigning for President Obama. I mean Romney wants to get rid of easy money Ben.
Perish the thought.

FundStudent

Reply to @Hiyield007: There may be a train wreck ahead. Take a look at this ugly chart and see what too much MBS did to my fund in 2008. I hope that your funds fair better than mine did:

http://quote.morningstar.com/fund/chart.aspx?t=opchx&region=USA

Don't get me wrong - I love your fund selections. But you may need a quick exit.

Hiyield007

Reply to @FundStudent: I have always kept my positions on a very short leash. When junk bonds are in a trending mode, as they have since June 6, I use a mere 1% to 1.25% stop. As for PONDX, I may use a 1 and 1/2% or 2% stop. Never let a winner turn into a loser and never be willing to give back too much of your profits.