PIMCO's creativity continues to amaze. Their ability to create any fixed income duration out of futures, swaps, and currencies is legendary. Look at the holdings in a PIMCO income fund compared to a Vanguard fund. Mind you, Vanguard short term bond funds cannot be beat because of their commitment to absolute quality of every single bond. Plus, their very low costs, some as low as 0.10-0.12 of one percent, blow everyone away in a low interest rate environment. I personally have a lot of my money in shorter term Vanguard municipal bond funds, VMLUX for example.
But if Vanguard is the brilliant individual instrumental player practicing at the conservatory, then PIMCO is the full symphony at Symphony Hall at its sparkling best belting out a full program of varied great symphonies and concertos. Let's look at the musical score in this total return chart from February 29, 2008, the first day of trading for PFATX, and just before the carnage began in 2008. This chart is through yesterday's close and shows annualized total returns.
Although PIMCO is currently rolling out individually managed equity funds, their strength has been to use equity indexes overlaid upon bond funds of various durations. Earlier versions of this strategy contained long (or short) SP500 index derivatives. PSTKX is an example with a short duration (less than one year) fund, and PSPTX is the same idea with a five year duration. The extra duration of four years during a falling interest rate period gives PSPTX a 2.4% return advantage. (Note also that even with PIMCO's addition of the short term bond fund for PSTKX, Vanguard's very low cost 0.07% VFIAX SP500 fund beat PSTKX's 1.10% cost with nearly one percent per year in total return as would be expected.)
As Ron Arnott's fundamental indexes were rolled out, it got even more interesting. The SP500 indexes on the basis of total market capitalization: the biggest capitalization stocks get the biggest representation. It's like a "Top 500" contest of the most popular tunes. Arnott uses other criteria such as P/E ratios, price/book and so forth to determine value and set the percent of each stock within the index. (http://rallc.com/index.htm) Arnott's RAFI indexes have historically returned nearly 2% extra per year to total returns compared to SP500. This is a huge increase for RAFI at the margin.
The chart shows two of these RAFI funds, PFPIX with a very short duration fund underneath, and PXTIX with a nearly five year duration bond fund underneath. With short term rates approaching zero, the first fund hasn't added any value over VFIAX given 1.45% annual cost. Remember: COSTS MATTER a lot. But then look at PXTIX with its nearly five year duration and RAFI index. Its return is over 7% better than the shorter duration PFPIX and about the same over Vanguard's VFIAX! So the bond fund total return approach makes sense in certain interest rate environments despite high annual fund costs (1.60% for PXTIX).
The last movement (to date) of this beautiful PIMCO symphony is PFATX. This 2008 addition to the symphony extracts the added value of the RAFI index by being long RAFI and short SP500 indexes and overlaying that on the five year bond fund. Look at the magenta line on the chart. PFATX is up an annualized 10.76% since just "before the fall" of 2008. that's 7.9% above the RAFI long duration PXTIX and a whopping 15% greater than VFIAX and PSTKX! And although PFATX did drop somewhat (-9.5%) during the crash into November 2008 and March 2009,VFIAX dropped 47% and PXTIX and PFPIX dropped over 55%, a brilliant performance of PFATX by Maestro Gross and the PIMCO Symphony.
To sum up: 1. brilliant thinking and performance matter, especially in extracting the RAFI advantage in PFATX. 2. costs really do matter, to a point and depending upon where they are. 3. value (RAFI) does not always trump popular polls (SP500), as we can see in the fact that VFIAX "outperformed" two RAFI indexes in the crash by 8-18% annualized down to March 9, 2009. 4. great past performances do not guarantee future successes.