Market Tumult Stings the New Bond King

Pacific Investment Management Co. investment chief

Daniel Ivascyn

is in a slump, hurt by a bet on housing bonds and investors’ flight to safety.

For much of the past decade, Mr. Ivascyn’s Pimco Income Fund has posted stellar returns. Its surging popularity made it the world’s largest actively managed bond fund and helped salve the wounds at Pimco left by the acrimonious 2014 departure of Mr. Ivascyn’s predecessor,

Bill Gross.

So far this year, though, the fund has returned 4.68%, falling short of the fund’s benchmark index and nearly all of its peers, according to Morningstar Direct. Among 338 funds in its category, Pimco Income has underperformed 93%, Morningstar said. In the past month, the fund is down 1.02%.

In an interview Sunday, Mr. Ivascyn traced the fund’s recent struggles to the weakened performance of trades that had powered the fund’s rise. Timely bets on mortgage-backed securities, for example, had been a big part of the fund’s strong returns.

But housing debt has underperformed corporate bonds this year. While neither consumer or corporate debt markets have shown much signs of stress in 2019, investors have tended to gravitate more toward bonds tied to companies, he said. And with interest rates declining, more homeowners are now paying off their mortgages in advance. That’s hurt returns on mortgage bonds backed by the U.S. government.

Trade tensions between the U.S. and China over the past month have also hurt. Those tensions have led U.S. stocks to sell off, and more money move into safer investments such as government and corporate bonds.

“Mortgage credit has just sat there,” Mr. Ivascyn said.

In addition, Pimco Income’s mandate as a fund for investors seeking higher payouts has left it largely on the sidelines during the recent rally of safer, longer-term and therefore lower-yielding, bonds. The fund seeks to avoid bonds with yields that slip below the expected rate of inflation, Mr. Ivascyn said.

As for his bet on mortgages, Mr. Ivascyn said “we’re very happy to be underweight corporate credit risk even though it’s done better this year.”

Mr. Ivascyn’s confidence stems from Pimco’s long-held belief that the regulations adopted in the wake of the financial crisis would keep banks from making as many riskier home loans as they had in the past. The prediction has largely come true, he said, and home-loan defaults have been limited.

By contrast, he said, standards on corporate loans have deteriorated steadily in recent years. A slowing economy could trigger a wave of defaults.

The Federal Reserve cut interest rates in July for the first time in more than a decade, deepening concerns of an economic slowdown. The demand for longer-term debt pushed yields on the 10-year Treasury note below two-year yields for the first time since 2007—another signal that the economy may soon slip into a recession.

The fund’s recent struggles haven’t yet tested Mr. Ivascyn’s belief that home-loan bonds will hold up relatively well. He argued they will beat corporate bonds should economic conditions deteriorate, as they did the last few months of 2018.

Don’t expect Mr. Ivascyn’s conviction to fade anytime soon, Morningstar analyst

Eric Jacobson


“If they looked at something and they think they’re wrong, they will bail out of it,” he said. “If they think they’re early, they’ll hold on to it. Dan’s not an emotional guy.”

Pimco appointed Mr. Ivascyn, a mortgage trader, as manager of the income fund just as a housing bubble was tipping the economy into its worst crisis in decades. By early 2008, Mr. Ivascyn was scouring offerings documents on mortgage-linked bonds to determine which were more likely to meet their obligations to investors—and were more likely to recover in value as the crisis subsided.

The work helped Pimco weather the downturn, juiced the returns of its income fund and changed the trajectory of Mr. Ivascyn’s career. Mr. Ivascyn succeeded Mr. Gross as the firm’s chief investment officer, and his income fund supplanted Mr. Gross’s former fund, Pimco Total Return, as the firm’s top seller three years later.

With Mr. Ivascyn’s fund raking in investors’ money, Pimco eventually stemmed the flow of assets that left to other bond managers following Mr. Gross’s departure.

Pimco Income now manages more than $130 billion in assets. And even with the recent downturn, Pimco Income still ranks first among similar funds over the past decade, Morningstar said.

Pimco was also among the prominent bond managers caught flat-footed by Argentina’s Aug. 11 primary elections, which triggered a sharp decline in both its local currency and stock market. On Friday, Fitch Ratings cut its sovereign ratings of Argentina to CCC from B.

“They didn’t get the full brunt of the pain, but they certainly felt it,” Mr. Jacobson said.

Pimco had predicted the South American country would stabilize. “Despite these risks and our expectation for continued volatility, current valuations in Argentina’s credit and local markets look reasonable,”

Pramol Dhawan,

an emerging-markets portfolio manager at Pimco, wrote in an Oct. 11 blog post.

Mr. Ivascyn said that Argentine securities and its currency accounted for a small part of Pimco Income’s underperformance and overall portfolio.

Argentine assets make up less than 2% of Pimco Income’s portfolio, a Pimco spokesman said.

Write to Justin Baer at

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