The PIMCO StocksPlus Long Duration Institutional Fund (PSLDX) is getting a lot of focus from our subscribers. It’s a fund we have described a number of times over the past 5 years.
There is a strange tendency in the commentariat to throw up its hands and say “PIMCO black box” and leave it at that which is not much of an analysis.
In any case, as of the last holding the fund’s $816m of net assets roughly breaks down into a $621m SPX total return swap, $540m corporate bonds and loans, $65m of agencies, $340m of long Treasuries (25-30y), $70m EM/ABS/Preferreds, $280m of sold CDS. Leverage looks high at around 35% – that’s very high for a mutual fund. Most of the leverage is in CDS rather than repo so it doesn’t necessarily pose a deleveraging issue from a 1940 Act perspective.
The combination of long-dated reasonable quality credit with stocks works very well – particularly when market weakness doesn’t come from an inflationary driver. In the last two major drawdowns (GFC, COVID) this worked like a charm with long-dated high-quality bonds rallying hugely and partially offsetting the drop in stocks. As I discussed in a couple of articles this doesn’t mean you have to rush out and buy the fund – it’s easy enough to build a similar type of position using SPX futures or 2x leveraged equity funds (monthly rebalanced Direxion mutual funds are preferable) alongside an income portfolio (long-duration higher-quality non-callable preferreds can work well here). That way you can generate a stronger yield than PSLDX does (which has a miserly 2.4% SEC yield).
Going forward, there are 5 key points to keep in mind for PSLDX:
- the combination of high-quality long duration bonds and stocks is a very good one because historically they have offset each other i.e. risk-free rates tend to fall when stocks move lower so you get diversification,
- the fact that the fund is leveraged was a huge boost for performance because historically both high-quality bonds and stocks have rallied strongly,
- given where risk-free rates are today it’s not mathematically possible for PSLDX to replicate its historic performance unless you think that rates move negative or stocks performance will be much stronger than it has been over the past 10-20 years.
- the key risk for PSLDX is if we see higher rates which then becomes a driver for stocks to move lower – not a crazy thought. In this case PSLDX will face a doubly whammy of lower returns on both of its core positions
- As the following chart shows PSLDX has underperformed the S&P 500 – its equity benchmark – this year. This makes it clear that it’s going to struggle to outperform stocks if we continue to see higher rates – the 10Y yield is up about 0.7% this year.
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