PIMCO Real Return Fund

Scorecard
4 / 5 Stars
Lipper
5 5 1 2 2
Zacks Investment Research
5 (Strong Sell)
Standard & Poor's
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TheStreet.com
E+ (Sell)

U.S. News evaluated 52 Inflation-Protected Bond Funds. Our list highlights the top-rated funds for long-term investors based on the ratings of leading fund industry researchers.

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Note: Profile written for different share class.

Performance

The fund has returned -6.56 percent over the past year, 3.73 percent over the past three years, 7.47 percent over the past five years, and 4.73 percent over the past decade.

Trailing Returns Updated 02.28.2014
Year to date 2.8%
1 Year -6.6%
3 Years (Annualized) 3.7%
5 Years (Annualized) 7.5%
10 Years (Annualized) 4.7%

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Summary

After a rough patch in 2008, the fund is hoping to return to "TIP"-top shape. Management seeks real return, which factors inflation into its total return.

As of March 05, 2014, the fund has assets of $15.51 billion. Its portfolio usually consists of TIPS, but management employs a wide range of fixed-income strategies, including the use of derivatives.

When there are concerns about rising inflation, investors tend to favor TIPS because the bonds' principal and interest payments are tied to inflation as measured by the Consumer Price Index. The more inflation, the higher the payment. In other words, the bonds allow investors to keep pace with rising prices. As a result, investors often use TIPS to make short- and long-term bets on inflation, or to provide some cover in the event of unforeseen inflationary pressures. The fund has returned -6.56 percent over the past year and 3.73 percent over the past three years.

Generally, the fund invests a majority of its assets in TIPS, but management will dabble in other high-quality bonds. "This fund is not only allowed to move away from TIPS market to other sectors of the bond market but also allowed to use derivatives," says manager Mihir Worah. "The way we use derivatives is essentially to obtain a targeted exposure to different parts of the bond market." Derivatives trading will generally show up as large cash holdings for the fund. PIMCO Real Return fund was the first institutional fund created to market TIPS to investors after "TIPS were introduced to the U.S. market in 1997 by the Treasury Department as an opportunity for the treasury to expand its financing mechanisms to cover the deficit," according to Raymond James. The fund has returned 7.47 percent over the past five years and 4.73 percent over the past decade.

Investment Strategy

As with all PIMCO funds, management is given a fair amount of leeway in investment decisions. The fund's prospectus says that generally, management will invest "at least 80 percent of its net asset in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments ... which may be represented by forwards or derivatives such as options, future contracts, or swap agreements." Management also reserves the right to invest all of its assets in derivative instruments or mortgage- or asset-backed securities, according to its prospectus. "The way we use derivatives--and we use them quite extensively--is to obtain the cheapest and most targeted exposure to the bond market that we can," Worah says.

Role in Portfolio

Morningstar assigns the fund a "supporting player" role.

Management

Mihir Worah became lead manager for the fund in late 2007. Former manager John Brynjolfsson, who is a two-time Morningstar Fixed-Income Manager of the Year, remains on staff.

Fees

PIMCO Real Return Fund has an expense ratio of 0.85 percent.

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Risk

Management will invest outside of the TIPS market if it feels valuations are attractive, which can open up the fund to more risk. Also, funds from other families have surfaced that are managed identically with lower fees, according to Morningstar.

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