Pimco Fund Trails Peers For A Second Year After Missing Rally

Pacific Investment Management Co.’s biggest mutual fund trailed a majority of peers for the second straight year after missing a rally in longer-term bonds and betting incorrectly that inflation would rise.

The $162.8 billion Pimco Total Return Fund, managed by Chief Investment Officers Scott Mather, Mark Kiesel, and Mihir Worah after the surprise departure of Bill Gross on Sept. 26, returned 4.7 percent in 2014, trailing 53 percent of comparable funds, according to data compiled by Bloomberg. In 2013, it lost 1.9 percent, lagging behind 65 percent of peers.

In May, amid the fund’s longest streak of redemptions, Gross vowed in a Bloomberg Television interview that Pimco’s performance will be at the top by the end of 2014. That didn’t happen as Pimco, guided by an economic view called the “new neutral,” predicted that shorter-term bonds will do better than longer-dated debt out of a belief that investors are overestimating how much the Federal Reserve will increase the benchmark rate. The managers were also stymied by sinking expectations for inflation amid a slump in oil prices. The new managers have said they’re sticking with their holdings.

“Although the long end of the yield curve has rallied in recent months, we believe our underweight is justified from a secular viewpoint,” Mather, Kiesel and Worah wrote in a Nov. 30 commentary posted on the firm’s website. “We will continue to hold intermediate TIPS, as we believe policymakers will ultimately be successful in raising inflation expectations.”

Agnes Crane, a spokeswoman for the Newport Beach, California-based firm, declined to comment.

Slower Growth

Pimco Total Return Fund suffered its biggest decline in almost two decades in 2013, hurt by similar positions in shorter-term debt and inflation-linked bonds. Under Pimco’s “new neutral” thesis, the firm’s outlook for the next three to five years set in May, global growth is converging toward lower, more stable speeds and interest rates will be stuck below pre- crisis levels.

The fund had 81 percent of its money in bonds with maturities of 10 years and less as of Nov. 30, according to the firm’s website, with the biggest concentration, 32 percent, in bonds with maturities of five to ten years.

The fund had 6 percent in maturities of greater than 20 years. As of the end of the third quarter, the average fund in the same category as Pimco Total Return had more than one-third of assets in bonds with maturities of 20 years or more, according to data from Chicago-based research firm Morningstar Inc.