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2 Unorthodox Equity Funds From PIMCO

StocksPLUS and StocksPLUS Absolute Return provide exposure to the S&P 500 while also seeking to outperform the index by investing in bonds.

Patricia Oey: PIMCO has a family of funds known as StocksPLUS funds, which are equity funds that capitalize on what PIMCO does best, which is bond investing. For these funds, PIMCO uses swaps or futures for exposure to an equity index, such as the S&P 500 or the MSCI EAFE, and invests the excess cash in an actively managed bond portfolio. Essentially, the bond strategy is the fund's potential source of alpha.

PIMCO has two offerings that provide exposure to the S&P 500: there is StocksPLUS, whose bond strategy seeks to return about 75 to 125 basis points, before fees. There is also StocksPLUS Absolute Return, which has a higher return target of 200 to 300 basis points, before fees.

StocksPLUS is run by Sudi Mariappa, who has broadly maintained the process he inherited from his predecessor, Bill Gross, and works closely with PIMCO's short-term bond team. With a well-established process and long-term returns above the large-blend category average, this fund carries a Bronze rating.

The Absolute Return strategy is run by Mohsen Fahmi, and the bond strategy here is similar to PIMCO Unconstrained. However, over the last two years, Fahmi has been adjusting the process to reduce the bond portfolio's correlation to equities, for example, by limiting exposure to credit and emerging markets. The fund's rating remains at Neutral given these recent process changes.

The structure of these funds is worth noting. Aside from the derivatives used for equity exposure, the funds, like many other PIMCO strategies, hold many derivatives in their fixed-income portfolio. In a sharp and sudden market downturn, margin calls or large fundholder redemptions could force the managers to sell these fixed-income derivatives, which could be challenging if liquidity dries up for a significant portion of the portfolio holdings.

Patricia Oey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.