Fixed income investors who listened to Wall Street earlier this year and bought bonds have been left holding the bag. Rates have yet to peak, and yields have continued to move higher, lowering the value of any bonds the investors already held.
So, what should income investors do now?
With so much uncertainty still surrounding the path of the global economy and interest rates, conservative investors may just opt for parking funds in short-term Treasury bills that currently yield more than 5.25%.
For more aggressive investors, the best path to follow is a diversified approach for the income-producing part of your portfolio. Let me show you what I mean…
Pimco Income Strategy Fund
An easy way to diversify the fixed income portion of your portfolio is through a closed-end fund like the PIMCO Income Strategy Fund (PFL). Run by one of the best-known names in the fixed income space, the CEF offers exposure to varying credit types, credit qualities, and regions of the world.
Here is a brief description of the fund overview pulled from Pimco’s website.
Employing a multi-sector approach, the fund seeks high current income consistent with the preservation of capital by investing in a diversified portfolio of floating and/or fixed-rate debt instruments. The fund has the flexibility to allocate assets in varying proportions among floating- and fixed-rate debt instruments, as well as among investment grade and non-investment-grade securities.
In addition, the fund will not invest more than 20% of its total assets in securities that are, at the time of purchase, rated CCC/Caa or below by each ratings agency rating the security. The fund’s duration will normally be in the short to intermediate range (zero to eight years).
Finally, yield is just one component of the portfolio manager’s approach. Also considered are capital appreciation and principal preservation.
Be aware, though, that the fund does use leverage (total effective leverage = 23.76%) to try and improve its performance. This makes it more volatile than a non-leveraged bond fund.
So-called junk bonds comprise the largest chunk of the portfolio, with roughly 43% of the fund made up of non-investment grade and unrated bonds. While there is a modest allocation (roughly 12%) to government and agency securities, this is mostly a corporate bond fund.
Overall, PFL still qualifies as a well-diversified portfolio given its global exposure (about 23%) and mix of maturities. Industry-wise, PFL’s top investment sectors are: healthcare (9.14%), technology (7.9%), banks (6.04%), and consumer products (5.79%).
Maturity-wise, most of the bonds are currently in the intermediate range, with 27.58% having a maturity of three to five years, and 21.81% having a maturity of five to 10 years.
PFL Track Record
The PIMCO Income Strategy Fund is nearing the 20-year mark from its IPO, so it has been through the 2008-09 global financial crisis and the coronavirus pandemic.
Since its IPO, the fund’s 204% total return translates to roughly 6% annually. Like most bond funds, it performed reasonably well up until the post-pandemic period, when the Fed began hiking interest rates and effectively hammering fixed income valuations.
During the depths of the brief pandemic-related recession, PFL fell nearly 50% from peak to valley, but managed to gain it all back and then some before the end of 2020. Right now, the price of PFL is sitting about 35% or so below its post-pandemic peak.
Closed-end funds can trade at a premium or discount to their net asset value (NAV). PFL trades at a small premium of 3.43%. This is no doubt due to investors being attracted by its high yield—12.46%. PFL maintains a fixed monthly distribution policy that currently pays $0.0814 per share, or $0.9768 per share annually.
Part of the reason why PFL trades at a premium is its history of stability in its distribution. Income seeking investors just love predictability when it comes to their income streams. And, with the exception of one post-pandemic instance, this fund has delivered steadily. Judging its track record, it seems that the fund managers are willing to let the net asset value decline in favor of distribution stability.
It’s rather unusual to find a fund that encompasses so many different regions, credit qualities, maturities, and credit types, but PFL does it. Its rock-solid distribution history over the past 20 years makes the PIMCO Income Strategy Fund quite attractive. Predictable income is a good thing. PFL is a buy under $8 per share.
