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Is PONPX a Strong Bond Fund Right Now?

Zacks Equity Research
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If you've been stuck searching for Diversified Bonds funds, you might want to consider passing on by PIMCO Income P (PONPX) as a possibility. PONPX carries a Zacks Mutual Fund Rank of 4 (Sell), which is based on nine forecasting factors like size, cost, and past performance.

Objective

We classify PONPX in the Diversified Bonds category, an area that is rife with potential choices. Diversified Bonds funds offer exposure to a wide variety of fixed income types, stretching across various issuers, credit levels, and maturities. Generally speaking, bond funds here will have sizable exposure to government debt, as well as modest holdings in the corporate bond market too.

History of Fund/Manager

PIMCO Funds is based in Newport Beach, CA, and is the manager of PONPX. PIMCO Income P made its debut in May of 2008, and since then, PONPX has accumulated about $26.28 billion in assets, per the most up-to-date date available. Daniel J. Ivascyn is the fund's current manager and has held that role since May of 2008.

Performance

Investors naturally seek funds with strong performance. PONPX has a 5-year annualized total return of 4.99% and it sits in the top third among its category peers. Investors who prefer analyzing shorter time frames should look at its 3-year annualized total return of 5.91%, which places it in the top third during this time-frame.

Bond Duration

Modified duration is a measure of a specific bond's interest rate sensitivity, and is an excellent way to judge how fixed income securities will respond to a shifting rate environment.

For investors who think interest rates will rise, this is an important factor to consider. PONPX has a modified duration of 3.11, which suggests that the fund will decline 3.11% for every hundred-basis-point increase in interest rates.

Income

We must remember to consider the fund's average coupon, as income is traditionally a big reason for purchasing a fixed income security. A fund's average coupon is simply its average payout in a given year. For example, this fund's average coupon of 3.59% means that a $10,000 investment should result in a yearly payout of $359.

For those seeking a strong level of current income, a higher coupon is typically good news. However, it could pose a reinvestment risk if rates are lower in the future when compared to the initial purchase date of the bond.

Because income is only one part of the bond picture, investors should also consider risk relative to broad benchmarks. PONPX carries a beta of 0.31, meaning that the fund is less volatile than a broad market index of fixed income securities. With this in mind, it has a positive alpha of 3.58, which measures performance on a risk-adjusted basis.

Ratings

Investors should also consider a bond's rating, which is a grade ( 'AAA' to 'D' ) given to a bond that indicates its credit quality. With this letter scale in mind, PONPX has 25.95% in high quality bonds rated at least 'AA' or higher, while 30.43% are of medium quality, with ratings of 'A' to 'BBB'. The fund's junk bond component-bonds rated 'BB' or below-is at 33.21%, giving PONPX an average quality of BBB. This means that it focuses on medium quality securities.

Expenses

For investors, taking a closer look at cost-related metrics is key, since costs are increasingly important for mutual fund investing. Competition is heating up in this space, and a lower cost product will likely outperform its otherwise identical counterpart, all things being equal. In terms of fees, PONPX is a no load fund. It has an expense ratio of 0.60% compared to the category average of 1.79%. Looking at the fund from a cost perspective, PONPX is actually cheaper than its peers.

While the minimum initial investment for the product is $1 million, investors should also note that there is no minimum for each subsequent investment.

Bottom Line

As a mutual fund with a 'sell' rank, PONPX is in the bottom 40% of all funds we cover and it may be one to avoid putting on your short list of possible picks in Diversified Bonds. This fund from PIMCO Funds needs to turn around some of its key fundamental metrics such as the Zacks Ranks of its holdings, alpha, and performance in order for investors to consider PIMCO Income P in the future.

For additional information on this product, or to compare it to other mutual funds in the Diversified Bonds, make sure to go to www.zacks.com/funds/mutual-funds for additional information. Want to learn even more? We have a full suite of tools on stocks that you can use to find the best choices for your portfolio too, no matter what kind of investor you are.


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