Summary

• Rates will stay low for the next 6-12 months.
• PIMCO Strategic Income Fund has an attractive yield.
• Bonds with short-term maturity rates will benefit.

The purpose of this article is to evaluate the PIMCO Strategic Income Fund (NYSE: RCS ) as an investment option. To do so, I will look at recent fund performance, current holdings and allocation, and trends in the market to attempt to determine how well it will do going into the new year.

First, a little about RCS. RCS is a closed-end fund that seeks to generate a level of income that is higher than that generated by high-quality, intermediate-term U.S. debt securities. That is the fund’s stated objective, with capital appreciation as a secondary objective. The fund is currently trading at $9.65/share and pays a monthly dividend of $.08/share, which translates to an annual yield of 9.95%. The fund had been doing fairly well year-to-date, but with the recent departure of Bill Gross from PIMCO. the fund has taken a recent beating, and is currently down a little over 1% for the year, excluding dividends. However, this compares to a drop of over 1.5% in the Dow Jones. a popular benchmark. Once dividends are taken in to consideration, RCS has comfortably outperformed the Dow, and with much less volatility. However, RCS, as well as other PIMCO funds, clearly have some serious headwinds in front of them, so I will outline a few reasons why RCS will overcome these and should perform well heading into 2015.

First, PIMCO funds have taken a serious beating. RCS is down around 6% in a month, and many other funds have suffered greater losses. However, these bond funds have serious value, with or without Bill Gross. While his investment knowledge is legendary, a bond fund’s most important trait is its reliability of payments. RCS has been making reliable distributions for almost 20 years, and its current distribution of $.08/share has been regularly paid since Q2 2011. Since Gross’ departure, the fund has maintained this payout, and will continue to do so going forward. The drop in share price has pushed the yield up to near 10%. In this current low rate environment, this is a very attractive yield. If the fund does continue to drop, the yield will go up even higher and eventually get to a level that investors just cannot ignore, providing genuine downside protection for the fund.

The second reason I continue to like RCS has to do with bond funds in general. In its most recent meeting, the Federal Reserve continued its pledge of low interest rates for a considerable time after its bond buying quantitative easing program winds down this year. With rates guaranteed to stay low going into the new year, many investors who had fled bond funds in fear of rising rates may soon return. Even when rates do rise, the rise is projected to be moderate and slow. A recent article by Bloomberg dissecting the Fed’s minutes showed only one member of the Federal Open Market Committee wanting rates above 2% by the end of 2015. The rest are split between wanting rates in the 0%-1% or 1%-2% range. That means for the next 14 months, it is a safe assumption that interest rates will be at 2% or lower, giving further motivation for investors to stay committed to funds paying 10% yields, such as RCS.

A final reason why I like RCS over some other PIMCO funds has to do with its objective of buying intermediate-term debt obligations. While I just outlined that rates should stay low for some time, they will inevitably rise. For this reason, it makes sense for investors to commit to short-term bond obligations, and not lock themselves in to maturity dates years into the future. Since longer-term bonds are more sensitive to rate increases. funds that invest in those types of bonds should be hurt more than funds like RCS which have shorter maturities, once rates begin to rise.

Of course, investing in RCS is not without risk. Gross’ departure could continue to wreak havoc on PIMCO funds and, if that happens, RCS will drop in value along with all the others. Additionally, rates could indeed rise faster than forecasted, in which case, bond investors will probably get clobbered, and quickly. However, I do not see either of these scenarios as likely. In a recent interview with a representative from Morningstar. an independent investment research firm, the representative stated the firm did not see an imminent risk of significant outflows from the fund (PIMCO Total Return Fund). Additionally, with inflation staying low, I do not think the Fed will have many reasons to accelerate its interest rate forecast, which will continue to make bonds a sound investment choice.

Bottomline: PIMCO funds have had a rough few weeks, and there are plenty of reasons for investors to stay clear of these funds for the time being. However, many funds are trading at levels near multi-year lows, such as RCS. You would need to go back to 2009 to see RCS trading consistently at its current level. This could provide investors with an attractive entry point, especially given that its yield is now near 10%. This yield is much higher than those found in many dividend ETFs, and the fund’s track record proves its distributions are reliable. Given that rates are set to stay low for some time, investors should continue to look for safety in bonds, and should give some thought to RCS as an investment option.

Disclosure: The author is long RCS. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.