There’s No Bond King, but Investors Keep Pouring Money Into Pimco Income

Conventional wisdom has it that actively managed funds are dead. Tell that to the investors pouring money into Pimco Income PIMIX month after month, year after year.

Take the latest monthly mutual funds stats. The multisector bond category is home to Pimco Income and 120 other funds. In May, Pimco Income took in $1.9 billion—68% of all the money flowing in the category and more than 5% of investor dollars in the overall taxable bond fund category (which consists of 1,976 funds).

That month was no outlier. This year, through the end of May, Pimco Income has vacuumed up $12.5 billion—55% of all inflows to the multisector category and more than 6% of cash heading to all taxable bond funds. Over the last 12 months, Pimco Income has taken 72% of the new money invested in multisector bonds and 6.5% of the cash flowing to taxable bond funds. It accounts for the second-largest inflows of any bond fund so far in 2024, and the most of any actively managed bond fund.

With $151.5 billion in assets, Pimco Income is the second-largest taxable bond fund after Vanguard Total Bond Market VBTLX, and the largest active taxable bond fund. It accounts for half of all the money in the multisector bond category. “No other bond fund dominates its category the way Pimco Income does,” says Eric Jacobson, director of manager research for US fixed-income strategies at Morningstar.

Dazzling Performance

Pimco Income has consistently outperformed its category, returning 7.5% annually over the past 15 years, compared with the category average of 4.8% and the Morningstar Core Plus Bond Index’s average of 2.8%. It is ranked in the 1st percentile of funds in its category for that period. “It’s not magic, but Pimco Income’s success has been dazzling,” Jacobson writes.

With this kind of dominance, there is no avoiding comparisons with the bond manager and fund that made Pimco a major player: Bill Gross (aka the Bond King) and Pimco Total Return PTTRX. It’s been nearly a decade since Gross left Pimco in a flurry of headlines and acrimony in September 2014. He founded Pimco in 1971 and rose to fame as manager of the titanic Pimco Total Return, which topped out at over $290 billion in assets in May 2013. It still held over $200 billion when Gross left, making it the largest bond fund in the world at the time.

The firm subsequently named Pimco Income’s manager, Daniel Ivascyn, as its new chief investment officer. Ivascyn, who joined in 1998, has managed Pimco Income since the fund’s launch in 2007. He shares responsibility with Alfred Murata and Joshua Anderson.

Pimco Income had a respectable $30 billion in assets at the beginning of 2014, but then it truly took off. “A lot of money left Pimco Total Return and went into Pimco Income after Gross left,” Jacobson explains. “Pimco Income’s record was excellent, and it continues to be.” Pimco Total Return continued to shrink as Pimco Income grew, overtaking Gross’ former fund by early 2017 when both had about $75 billion in assets. Pimco Total Return currently holds just over $50 billion in assets.

Betting On Non-Agency Mortgages

Multisector bond funds have wide-ranging strategies, owning US government debt, US corporate bonds, foreign bonds, and high-yield US debt securities. According to Jacobson, a key reason for Pimco Income’s outperformance is a “once-in-a-career” big investment in non-agency mortgage-backed securities made in the wake of the financial crisis, which hit just as the fund was getting off the ground.

Mortgage-backed securities are fixed-income investments representing shares of a bundle of mortgages sold off by the bank that made them. Non-agency mortgages are not issued by Ginnie Mae, Fannie Mae, or Freddie Mac, meaning they are potentially riskier. “A lot of [non-agency mortgage] bonds got down to 30 to 40 cents on the dollar after the financial crisis,” says Jacobson. “Most of the risk had been wrung out of them, and what was left behind was stable and starting to do better. But to invest there, to get those resources for analysis, you’ve got to really know what you’re doing. Only a few mutual fund shops were willing to dedicate the resources to play in that neighborhood.”

The US housing market’s recovery in the wake of the financial crisis has meant that, despite having comparably high yields, these mortgage-backed securities were fairly stable investments—they had been bought cheaply and recovered well. This is borne out quantitatively, with Pimco Income’s standard deviation—a measure of how volatile a portfolio’s returns are—over the past decade coming in at 4.9, compared with the category average of 5.8.

More recently, the fund has delivered solid returns. It ranks in the 28th percentile over the past five years and the 21st percentile over the past three. Its performance in the past year has been more average, placing it in the 51st percentile.

What’s Next for Pimco Income?

Jacobson says one potential challenge for Pimco Income is that there’s been little issuance of non-agency MBS since 2007. While the fund has grown, there are fewer sources of that asset. However, he says Pimco Income has found ways to stretch what exists. They’ve bought non-agency MBS from banks unloading them for regulatory reasons, and have purchased securities based on reperforming loans (loans that had to be renegotiated after borrowers couldn’t pay under the current terms, then were sold off after the borrower started making regular payments again).

However, these sources will eventually dry up unless issuance expands enormously. Jacobson says investors in Pimco Income will “do quite well, but it’s almost impossible for them to replicate the numbers that they had before.”

He says another potential issue is the fund’s size. Pimco Income holds $150 billion, and roughly another $100 billion follows the same strategy but is managed outside the fund. That has likely diluted the fund’s performance “a little bit,” Jacobson explains. “There’s no question that the larger you get, the more you’ll depend on bigger and bigger trades. At some point, the bond level picking gets less important because no single bond will push the needle. But if you’re pretty good at taking advantage of sector cheapness and do a reasonable job with duration, you still have a much better fighting chance.”

Jacobson remains optimistic, emphasizing that the size and rate of issuance in the bond market make it harder for growing assets to affect Pimco Income than a comparably sized stock fund. And he isn’t counting out Pimco finding another big trade to bring returns. He emphasizes that Pimco has a deep bench of experts in various fixed-income sectors, who could give the fund an edge in taking advantage of the next major area of market distress.