Q: I see the heavy emphasis the Plumb Performance Portfolio places on PIMCO’s Commodity Real Return Fund (PCRIX for those who have the substantial minimum investment, PCRDX for those who don’t).
According to the prospectus, the fund makes substantial use of derivatives; invests a substantial portion of its assets in a special PIMCO subsidiary fund registered in the Cayman Islands; uses structured notes; and so on. It seems that all of these things are evidence of (for lack of a better word) an “exotic” fund structure. I don’t understand the “structure” or risks of “structured” notes. I assume that PIMCO established an entity in the Caymans to do something that PIMCO would not be allowed to do in the United States––but I don’t know what that “something” is, or what additional risks it may raise (both in and of itself, and in the presumably lax regulatory atmosphere of the Caymans). And these days, when I see the word “derivatives,” I am automatically wary. . . . So I can’t tell if this is one very clever fund––or an accident waiting to happen. I am not talking here about the simple risk of poor returns based on commodity market prices but, rather, about risk issues raised by the unusual structure of the fund itself.
Considering the sizable role of PCRIX/PCRDX in your portfolio, I take it that none of these points concern you very much, and that you must think this fund is quite safe. So my question is: Why?
A: Unfortunately, I worry about everything. That’s why I make it a rule to avoid investing in anything I don’t understand. Given the sizable allocation of our personal portfolio to PCRIX, I have spent an inordinate amount of time studying it. The points you bring up concern Pimco’s “RealReturn” strategy wherein they use derivatives to mimic an underlying index (in this case DJAIG) and invest the collateral in fixed income securities (in this case TIPS). They also employ the RealReturn strategy in the funds I use for U.S. equities (PXTIX) and REITs (PRRSX).
Given our large allocation to these funds, I had to get very comfortable with them. I’ve had numerous discussions with experts who are both pro and con PCRIX. Even those who don’t like the fund do not dislike the structure. They dislike it because they think the diversification and return potential of the fund is overrated. They don’t buy into the idea of trying to ride a long-term bull market in commodities and avoid the subsequent bear market. I’ve also had discussions with Pimco’s RealReturn Product Manager, Bob Greer, about PCRIX and the RealReturn strategy, in general. With respect to the Caymans, I think this is for the same reasons that most corporations incorporate in Delaware, or lots of companies opening facilities in Ireland—tax advantages. I do have a lot of confidence in Pimco, but we’ve seen how quickly once strong firms can deteriorate. Still, in the nearly six years I’ve been investing in this fund, it’s done exactly what they said it would do.
