By Tom Bradley

I generally don’t go through prospectuses of new issues. Scott put one in front of me last week, however, and it made me wonder if I’ve been missing out. The document, which was related to the PIMCO Global Income Opportunities Fund, had all kinds of interesting stuff in it.

First of all, it was impressive that $600 million could be raised in a product with PIMCO’s name on it. The firm is the leading fixed income manager in the world and has an excellent long-term record, but it’s been getting bashed lately in the press (mostly unfairly I might add). PIMCO is under the microscope after a so-so year in 2013 and the departure of Chief Executive Officer Mohamed El-Erian.

Second, this baby is high octane. The fund does not have a set distribution, but will start by paying out monthly at an annual rate of 6.5% per year. The overall Canadian bond market (as measured by the DEX Universe Bond Index) is yielding 2.5%. PIMCO will hold government and corporate bonds from around the world and use leverage. The fund will closely replicate the PIMCO Dynamic Income Fund, a U.S. closed-end fund (symbol – PDI).

While the Global Income Opportunities Fund invests primarily in fixed income securities, its return target suggests putting it in the higher risk portion of a portfolio along with stocks. It definitely shouldn’t be used as a substitute for GICs, a bond ladder or a conservative bond fund.

Third, initial buyers of the fund will need to be patient. They’re paying for all the underwriting and sales costs, so a $10,000 investment will translate into about $9,500 in the fund. If PIMCO has a good first year and earns the projected yield (6.5%), the buyers will be back in the black to start year 2.

Last but not least, the most eye-catching thing about this issue is the conflict of interest that’s built into the pricing. The management fee of 1.25% is based on total assets, not the net asset value (total assets minus debt), as is the case with almost every other fund in the market. This means that at the expected level of leverage (25%), the unitholders will pay 1.67% of their market value.

What this also means is the more leverage PIMCO uses, the more it will get paid. I don’t have any worries about PIMCO’s integrity in this situation, but embedding an explicit conflict in the compensation is highly unusual. Indeed, it’s surprising this structure received approval from provincial regulators.

My advice to investors who want a turbo-charged version of PIMCO is to be patient and look for an executive-driven model. Rather than getting intoxicated by the smell and roar of a new one, let the initial investors pay the issue costs and sales commissions, allow some time for the trading to settle down and watch for a chance to buy the fund at or below net asset value.