PIMCO: A "Dynamic" Play on Mortgage Income

11/14/2017 5:00 am EST

Focus: FUNDS

David Fabian

Managing Partner, FMD Capital Management

Through the course of our analysis, we continue to favor PIMCO’s view of defensively managing interest rate exposure through hedging key risks, explains David Fabian, money manager and editor of the Flexible Growth & Income Report.

Most of their funds have performed admirably in this most recent move higher in interest rates, when comparing the impact of effective durations overlaid on prices of treasury indexes.

Effective duration is a measure of a fund’s sensitivity to changes in interest rates, so a negative effective duration is indicative of a portfolio designed to capitalize on rising rates. They have been able to achieve this goal, all while maintaining strong portfolio income and decent dividend coverage.

When we look at our current portfolio, we need to continue to be nimble to capitalize on current opportunities, which is why we are recommending that subscribers allocate 5% of their total portfolio to the PIMCO Dynamic Credit and Mortgage Income Fund (PCI).


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Given near-term pricing anomalies with PCI, and we believe that now presents a good time to begin building a starter position that we can add to over time. PCI has posted excellent returns since inception and now sits at a discount more than double its 52-week average.

Furthermore, it remains one of the only PIMCO funds that trades at a discount relative to its NAV, which is an attractive characteristic for our fundamental outlook.

Lastly, PCI has exhibited negative duration in relation to fluctuations in interest rates over the last several weeks. So while the price has fallen due to dividend coverage and interest rate fears, the NAV has concurrently risen, providing even more value to the diverging trade.

While we could be at the precipice of macro changes to the fixed-income investing landscape, we continue to believe PCI will perform well over the intermediate to long-term. We can always make changes to other areas of the portfolio to reduce risk if rates continue to rise or adjust our net exposure to other asset classes.

Our starting buy price for the PCI trade will be based on the closing price on Thursday October 26, 2017. We will continue to update all subscribers on any additional changes to the portfolio in the coming weeks as we receive fresh data on the markets.

Subscribe to David Fabian's Flexible Growth & Income Report here

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