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Purchasing two PIMCO bond funds [ClearOnMoney]
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Purchasing two PIMCO bond funds

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Investment

Purchasing two PIMCO bond funds

4 Mar 2010 by Jim Fickett.

On Friday I will put 2% of the portfolio into each of two PIMCO bond funds – a local-currency, emerging market fund and the well-known total return fund.

The more interesting one is PIMCO Emerging Local Bond Fund (PELAX). This fund invests in local currency bonds of emerging markets.

The top 7 countries by holdings, covering about 70% of the fund, are Mexico, Brazil, Poland, Turkey, Thailand, South Africa, and Malaysia. For some time I've been meaning to increase my share of foreign investments generally, and one thing that attracted me to this fund was that I have done some research on all 7 of these countries over the last couple years, and feel that all of them are solid investing destinations even for a conservative investor.

Just as a matter of personal preference, I like to buy individual bonds and have full control, but it is not practical for the individual investor either to buy emerging market local currency bonds or to stay on top of local politics for many countries. PIMCO reports quite a bit about their thinking concerning the goals, countries, and portfolio strategy, so it is not hard to insure that their goals match one's own. And of course PIMCO is fully competent.

My first main goal in buying this fund is to diversify out of dollars. Two or three years from now I would hope to have only about half the portfolio in US dollar-denominated assets. There are strong reasons for not going too far in this direction – most of one's liabilities are in one's home country, and one's knowledge of foreign countries is never as good as that of the home country. On the other hand, I am not optimistic about the long-term health of the dollar. And as has been remarked many times now, many emerging markets came through the crisis in a stronger position than most of the developed world. For example the budget deficit in Mexico, the top country by holdings in the fund, was 2.3% of GDP last year and will be about 2.8% this year – far better than the US or most European budgets. For a change, then, risks in emerging markets may not be much greater than risks at home.

My second main goal was to get a little more yield without taking too much risk. Taking Mexico as an example again, the 10 year government bond is yielding about 7.5%, and inflation is currently running at about 4.5%, for a real yield of 3%. Fitch gives Mexico a local currency rating of BBB+, and inflation has been under control for about 10 years now.

Overall, the fund's current yield is 5%, the average credit quality is BBB-, and the average duration is fairly short at 4.44 years. Volatility is to be expected, but I am willing to hold this for the long term, and I think it will, overall, hold or increase its value.

The second fund I am buying is PIMCO Total Return Fund (PTTAX). This fund and its manager, Bill Gross, are so well known I will not say too much about it. Both yield (about 2.7% currently) and volatility (trading in about a 10% band over the last few years) are much lower than the emerging market fund. I view this fund as a safe place to park money. As I've mentioned before, I think US interest rates are likely to rise, and that bonds generally will therefore face a headwind. But PIMCO Total Return has a solid history of trading to take advantage of market vicissitudes, and it is likely they will provide a decent return again.