Why We Still Highly Rate Pimco Total Return

Key Morningstar Metrics for Pimco Total Return

• Morningstar Medalist Rating: Silver
• Process Pillar: Above Average
• People Pillar: High
• Parent Pillar: Above Average

Pimco Total Return’s PTTRX standout team and vast resources remain among the best in the business, but recent process enhancements introduce some uncertainty. In recognition of this, the fund’s Process Pillar rating has been downgraded to Above Average from High, while its People Pillar rating remains at High.

Manager Scott Mather’s late 2022 retirement was a loss, but one this fund can handle. Mather began a personal ‎leave in October 2022 (Pimco removed his name from this fund then) and decided to retire ‎at the end of the year. The firm delegated Mather’s lead responsibilities to Pimco stalwart Mohit Mittal, who was named CIO of core strategies in late 2023 and had helped manage this fund since 2019 and similar total return strategies since 2013. Pimco’s global credit CIO Mark Kiesel, who joined the team in 2014, remains as well, while group CIO Dan Ivascyn and seasoned global bond manager Qi Wang have now joined the roster. This is Wang’s first time as ‎a ‎named manager on a publicly available offering, but she has contributed to Pimco’s macro analysis ‎and alternative ‎strategies for years and built a strong reputation running a flagship Pimco global-macro ‎hedge fund. The firm also recently named her as CIO for portfolio implementation, and she ‎has ‎been a member of Pimco’s investment committee since 2015. ‎

This fund combines the Pimco investment committee’s macro forecasting with ‎‎bottom-up analysis to determine interest-rate, yield-curve, currency, country, sector, and security-‎‎level decisions.‎ Pimco’s resources that inform broad macro calls all the ‎way down to individual security ‎decisions are topnotch, and its successes have typically been sufficient to keep it ahead of its Bloomberg U.S. Aggregate Bond Index. However, with a profile ‎more consistent with a core (rather than ‎core-plus) portfolio of late, its returns relative to its peers ‎have been middling. Many of those rivals have benefited from ‎their higher exposures to investment-grade and high-yield corporate bonds. ‎

Prolonged middling performance has led management to reevaluate the process and encourage more risk-taking. This adds some uncertainty to an already complex process. Mittal will still follow Pimco’s successful multisector approach, but he aims to opportunistically incorporate more of the firm’s higher-conviction views against its benchmark than his predecessor.

In theory, this will give the fund a better shot at accomplishing its goal of 100-150 basis points of outperformance per year (before fees) over the Aggregate Index. Pimco has a good track record of enhancing struggling strategies, as it did recently with its emerging-markets debt platform. However, it isn’t yet clear how the changes will affect the fund’s typically strong downside protection during credit selloffs. Still, given its resources and newly bolstered management ‎staff, this remains one of the most compelling options around which to build a bond portfolio.‎

Pimco Total Return: Performance Highlights

Mittal is hoping to get things back on track, but his tenure is still in its early days. The strategy’s 6.3% return for 2023 beat the Aggregate Index by 77 basis points but still lagged its typical peer’s return by 10 basis points, mainly because of its relatively light allocation to high-yield credit.