PSLDX: How ‘Bout Them Apples?

In the second half of last year we got a lot of questions about the PIMCO StocksPLUS Long Duration Fund Institutional Class (PSLDX). Typically what happens is a fund shows very strong recent performance and investors get excited and want to jump on the bandwagon. This doesn’t always end well – in the case of PSLDX the fund is down 26% from its peak just a few months ago.

The fund holds both stocks and long-term Treasuries – a combination that has delivered exceptional returns over the past decade and one that also provides a good measure of diversification.

However, as we highlighted in a blog post a few months back the key risk for the fund was a back-up in rates and the knock-on impact on stocks. Specifically, because longer-term rates were at unusually low levels and the Fed was about to embark on liquidity withdrawal the timing for new sizable allocations into PSLDX was questionable.

What are the lessons for income investors here? First, allocate based on valuation rather than price momentum. Secondly, consider if historic diversification is liable to break down in the medium term. Three, consider allocating with a margin of safety i.e. shortening up duration and/or allocating part of the portfolio to more defensive assets. And four, consider allocating to funds with a true income profile – PSLDX has a very low underlying yield which makes it difficult for the fund to offset negative price returns.

At this point PSLDX is certainly more attractive than it was in 2021 and if 10Y Treasury yields move north of 2% while stocks continue to retreat, PSLDX can be an attractive part of investor portfolios.

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