September 12, 2011

PIMCO’s Gross Enduring Worst Year Since ’95

Big bets on credit, Italian sovereign debt among reasons for stumble

PIMCO Chief Bill Gross. PIMCO Chief Bill Gross.

PIMCO Total Return Fund, the world’s largest mutual fund, is having its worst year relative to rivals in 16 years.  

Based on records going back to 1995, Bloomberg reports that the performance of Treasuries is one reason, combined with a bet of almost $11 billion in the second quarter on an index of U.S. corporate credit risk. Bloomberg also said that fund manager Bill Gross raised the amount of insurance the fund provides on sovereign debt and invested $1.3 billion into Italian Treasury bonds linked to inflation.

Through Sept. 8 of this year, Bloomberg reported that PIMCO Total Return gained 3.9%, with dividends, trailing the 6.6% advance by its benchmark, the BarCap U.S. Aggregate Total Return Value Index.

“Since June 2010, Gross has been reducing the $245 billion fund’s vulnerability to interest-rate swings and increasing its reliance on credit quality by shifting from Treasuries to corporate and non-U.S. sovereign debt, a strategy that backfired last month,” according to Bloomberg. “As the U.S. economy slowed and Europe’s debt crisis worsened, investors sought the safety of Treasuries and sold the bonds PIMCO had bet on, leaving the fund trailing 89% of competitors in August and 67% this year through Sept. 8.”

“People are focusing on the Treasuries, but the real issue is that the other credit instruments didn’t do as well,” A. Michael Lipper, head of Lipper Advisory Services in Summit, N.J., told Bloomberg. “They had way too much, short term, of the underperformers.”

The amount of protection issued by PIMCO Total Return on debt tied to corporate borrowers, municipalities and sovereign governments outside the U.S. rose to $43.6 billion as of June 30 from $19.6 billion a year earlier, the filing shows.

Gross hasn’t lost money in any year since 1999, when PIMCO Total Return declined 0.3%, including dividends, and trailed 59% of the competition, according to data compiled by Bloomberg. In 2010, the fund returned 8.8% to beat 82% of its peers.

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