Fund Comparison Question From A Client

This morning, I received an email from a client wondering why I preferred one fund to another fund.  It was a great question and the kinds of emails I like getting because it helps me to show someone the differences between mutual fund investments.

Here's the email below:

Hi Gary,

For category “Intermediate Govt Bond”, why do you prefer “Pioneer Government Income Fund (AMGEX)” not “Pimco GNMA Bond (PAGNX)”?

Thanks,

(Client)

Return Email:

Good Morning (Client),
Thank you for your email.  With respect to researching which funds are best, we look at overall performance, internal mutual fund expenses, and fund risk.  On your 401K fund selection sheet, the Pionner Govt Bond Fund (AMGEX) was a previous fund option that we did not agree with and decided to change to the Pimco Govt Bond Fund (PGOVX).  The Pimco GNMA Bond Fund (PAGNX) that you referenced is a great mutual fund, but it does not have the track record and is more expensive and risky than the PGOVX fund on the bottom of your fund selection list that we have suggested.  The PIMCO GNMA fund you mentioned invest in a lot of mortgage backed securities and therefore the returns are not as high as the fund that I put on the bottom of the fund page (PGOVX).  Here's a breakdown of the expenses and the returns of each of the three funds.

Pioneer Govt Income Fund (AMGEX)
Returns
1.  7.09
3.  5.20
5.  6.07
10.  4.63
Expenses 1.17% (high)
Risk - high

Pimco GNMA Fund (PGOVX) - fund you mentioned
Returns
1.  8.15%
3.  7.95%
5.  7.38%
10.  5.80%
expenses .90% (average expense)
Risk - average

Pimco Govt Bond Fund (PGOVX) - fund we picked which is at the bottom of your fund selection sheet
Returns
1.  28.88%
3.  12.55%
5.  11.62%
10.  8.98%
Expenses - .47% (low)
Risk - low


As you can see, the PGOVX fund has much better returns, lower fund expense (almost half of PAGNX) and is associated with much less risk.  The reason the Govt Bond Fund (PGOVX) has better returns is that it is not as correlated to mortgages rates as the GNMA (PAGNX) and the (AMGEX) funds are - which as you know fluctuate.  All that being said, if you'd like to invest in the Pimco GNMA Fund (PAGNX) you certainly have the ability to do so.

I hope I answered your question.  Please call or email anytime.

Sincerely,
Gary Heady Jr.
HI Management Services
(803) 477-3273

My point in putting this email up here is to show how different mutual funds can be from one another.  If you ever have a question regarding a mutual fund, I recommend you go to http://www.morningstar.com/ and check it out.  You can either type in the name of the fund or put in the cussip/ticker symbol at the top of the page.  The site is generally free although you can pay for the "upgraded" site, but that really isn't necessary.  On the webpage, you can look at the expenses, fees, returns, holdings, and risk of any mutual fund.

Just thought I'd pass that along to ya..