Recently, 1M65 Mr Loo has been talking about his potential investment target into the PIMCO GIS Income Fund which gives a more than 6% annual distribution yield (with payout on a monthly basis). On the contrary, we have Master Leong bashing the PIMCO GIS Income Fund ("PIMCO GIS") for various reasons such as the fund being mostly US focused (and his view that USD is weakening and thus upcoming huge forex losses for those who invested). In addition, Master Leong also warned about its high risk investment into assets such as the Mortgage Backed Securities ("MBS") credit default swap instrument. The credit default swap makes up about 20.22% of the investment of PIMCO GIS. Master Leong also mentioned that PIMCO GIS is using leverage which is extremely risky. Also, based on current US treasury yield of 4% to 4.45% (depending on the tenure), Master Leong asserted that the sustainable yield is only around 4% and the excess of 2% plus return is actually from capital. Henceforth, Master Leong is insinuating that PIMCO GIS NAV fund price is on a perpertual downward trend due to depleting payout funds from original capital. So, is PIMCO GIS a junk investment as per what he asserted?
1. Seeing with your eyes rather than hearsay- Is PIMCO GIS gone case?
Master Leong is a contrarian and has been gaining fame recently for his stock-picks which adopts the value investing approach. He has been highlighting the overvalued US market (28 times earnings) relative to China/Hong Kong markets (12-13 times earnings). For PIMCO GIS, based on my own personal experience, it is not exactly as bad as what Master Leong asserted.
2. Assertion that PIMCO GIS has too much USD (which is weakening over the long term) exposure.
The fact is that PIMCO GIS is hedged to SGD. The only issue here is what is the effectiveness of the hedge. To illustrate using a quick high level mental acrobatics exercise, if the hedge is 70% effective and say one invested S$100,000 into this unit trust, then S$30K will be exposed to USD foreign currency movement. So a drop of 20% in USD vs SGD will mean a S$6K capital loss in 5 to 10 years. This potential decline is actually already compensated via the interest income in a single year. So it is a fallacy that the entire S$100K of investment is being exposed.
My PIMCO GIS investments so far has held up well with its capital value intact since mid-2023 and I have been getting 6%+ annual return via the monthly distribution into my bank account.
Of course, if one has bought it during the pre- drastic inflation period of 5 years ago (2020-2022), then one would have been sitting on heavy capital losses (please see NAV chart above) . The capital losses from this period is certainly not because of USD weakness but mainly due to the surging Treasury risk free rates from near zero percentage (due to raging inflation) whereby the US Fed suddenly went on a spree to adjust interest rates upwards swiftly. The old adage of bond prices is inversely proportional to interest rate is unchanged here for this bond fund.
3. Assertion that PIMCO GIS uses lots of leverage which amplify gains but also losses.
Strangely, even Master Leong is unable to provide an exact figure of how much leverage is being employed by PIMCO GIS but then insinuate that this is a major factor. So, I will suggest folks to raise query directly with their platform or PIMCO GIS fund manager. Else, it is hard to decipher whether this is a material number. For myself, I have also been using leverage in my equities investment and levergae is not a dirty word. Key to employment of leverage is risk management and the quantum of leverage employed. The track record for PIMCO GIS has been wonderful especially for my current foray into PIMCO GIS via Endowus.
I think that MBS triggered off crisis from 2008 global financial crisis is real. However, lot of investments also collapsed during a deep recession for both equities and bond funds. So, not a fair point. If you want safe risk free investment, then the rate of return will be only 2% to 3% in Singapore. PIMCO GIS as per above illustrative screenshot is a well-diversified bond fund.
5. Assertion of High Fund Level Expense of 1% to 1.5% for PIMCO GIS
Endowus PIMCO GIS is only 0.85% (0.55% fund level + Endowus 0.3%). The 1% to 1.5% is probably referring to the PIMCO GIS being sold by local banks and their relationship/investment managers.
6. Assertion that the sustainable return (interest income) of PIMCO GIS is only 4% with rest of one-third payout from capital
I really have to disagree with this assessment and assertion:
(i) MBS Credit default swap already around 6.5% to 7%;
(ii) investment grade bond and high yield bonds in the portfolio 5.5% to 8%;
(iii) Treasury bonds- 4.45%.
Based on above interest income return and the weightage mentioned in item 4, I thought it is fairly close to 6% hence I am puzzled by the comment that one-third of PIMCO GIS distributions are being paid-out from capital.
Parting thoughts
The beauty of a bond fund is the sheer number of bonds inside it that enable one to have a well-diversified portfolio of bonds to prevent over-concentration risk should an entity default on its bond obligation. For an income investor, I am fine with the NAV movement volatility. So far (touch wood), my investments during the high interest rate period from 2023-2024 seems fine. Even my recent tranche in 2025 is holding up well in terms of its NAV capital value.
Do take note that bond funds will still have its share of market risk and does not mean that they are risk free. Ok, that's all for today....Bye folks and have a great week ahead!
Hi, good to see your analysis of Leong's youtube.
ReplyDeleteThe strange thing about this fund is even though it is sort of a fixed income fund and doesn't hold equities, but it is so volatile with a higher 3-year annualised volatility and a lower 3-year annualised volatility compared to a balanced fund like LionGlobal All Seasons (standard). I think an investment moats article pointed out that a 6 month difference in when you enter the fund could have a huge impact on future returns.
I looked at it since it was in the FSMOne top sellers list and I was looking for places to park my maturing T-bill cash, but in the end, preferred the LionGlobal All Seasons standard.
Since there is 0% sales charge for funds (unlike ETFs), to me no real advantage of an income funds since I can just sell some of the funds every month to raise cash if I really needed the cash, so volatility and sharpe ratio more important to me.
Hi Hello World, thanks for dropping by and also sharing about the LionGlobal All Seasons fund. :)
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