The tumult of the market stings the new bond king

However, so far this year the fund has returned 4.68%, which is below the Fund's benchmark and almost all of its peers, according to Morningstar Direct. Of the 338 funds in its class, Pimco Income underperformed 93%, Morningstar said. In the last month, the fund lost 1.02%.

In an interview on Sunday, Ivascyn explained that the fund's recent difficulties have been linked to the weakened performance of the deals that fueled the rise. For example, timely bets on mortgage-backed securities contributed significantly to the fund's strong returns.

However, housing-related debt underperformed corporate bonds this year. While neither the personal and corporate debt markets showed much signs of stress in 2019, investors tended to focus more on corporate bonds, he said. . And with declining interest rates, more and more homeowners are paying off their mortgages in advance. This hurts the yields of mortgage bonds guaranteed by the US government.

Trade tensions between the United States and China over the past month have also hurt. These tensions led US equities to sell and more money was invested in safer investments such as government and corporate bonds.

"The mortgage has just sat down," said Ivascyn.

In addition, Pimco Income's mandate as a fund for investors seeking higher earnings left it largely on the sidelines of the recent recovery of safer, longer-term and therefore less profitable bonds. The fund seeks to avoid bonds whose yields are slipping below the expected inflation rate, Ivascyn said.

Regarding his mortgage wager, Ivascyn said, "We are very happy to underweight corporate credit risk, even though it performed better this year."

Mr. Ivascyn's confidence stems from Pimco's long-standing belief that the regulations adopted as a result of the financial crisis would prevent banks from making as much riskier home loans as they have in the past. The forecast is largely achieved, he said, and the defaults on home loans have been limited.

On the other hand, he said, standards for business loans have steadily deteriorated in recent years. An economic slowdown could trigger a wave of defects.

The Federal Reserve cut interest rates in July for the first time in more than a decade, compounding fears of an economic slowdown. Demand for long-term debt has pushed down 10-year Treasury yields below two-year rates for the first time since 2007 – another sign that the economy may soon sink into a recession.

The fund's recent struggles have not yet tested Mr. Ivascyn's belief that mortgage bonds would stand up relatively well. He claimed that they would beat corporate bonds if economic conditions deteriorated, as they did in the last months of 2018.

Ivascyn's conviction is not expected to fade anytime soon, Morningstar analyst

Eric Jacobson

I said.

"If they look at something and think they're wrong, they'll get out," he said. "If they think they are early, they will cling to it. Dan is not an emotional guy.

Pimco has appointed Mr. Ivascyn, a mortgage marketer, director of the income fund, just as a housing bubble plunged the economy into its worst crisis in decades. In early 2008, Mr. Ivascyn reviewed mortgage bond documentation to determine who was most likely to meet their obligations to investors – and those who were more likely to recover value as they settled. the crisis was resuming.

This work helped Pimco overcome the economic downturn, recover income from his income fund and change the career path of Mr. Ivascyn. Mr. Ivascyn succeeded Mr. Gross as the company's chief investment officer, and his income fund supplanted Mr. Gross's former fund, Pimco Total Return, as the company's best seller three years later. .

With funds invested by Mr. Ivascyn in investor money, Pimco ended up stopping the flow of assets left to other bond managers after the departure of Mr. Gross.

Pimco Income now manages over $ 130 billion in assets. And even with the recent slowdown, Pimco Income still ranks first among similar funds over the past decade, Morningstar said.

Pimco was also one of the prominent bondholders caught unprepared by the August 11th primary elections in Argentina, which led to a sharp decline in the local currency and the stock market. On Friday, Fitch Ratings cut its sovereign ratings from Argentina to CCC from B.

"They did not have the full weight of the pain, but they certainly felt it," said Jacobson.

Pimco had predicted that the country of South America would stabilize. "Despite these risks and our expectations of continued volatility, current assessments of Argentina's credit and local markets seem reasonable,"

Pramol Dhawan,

a portfolio manager for emerging markets at Pimco, wrote in an October 11 blog post.

Ivascyn said Argentina's shares and its currency represented a small part of Pimco Income's underperformance and overall portfolio.

Argentine assets account for less than 2% of Pimco Income's portfolio, said a spokesman for Pimco.

Write to Justin Baer at [email protected]