(Bloomberg News) Pimco Total Return Fund, the world's largest mutual fund, is having its worst year versus rivals based on records going back to 1995, and Bill Gross's decision to dump Treasuries isn't the only reason.
Gross bet almost $11 billion in the second quarter on an index of U.S. corporate credit risk, raised the amount of insurance the fund provides on sovereign debt and put $1.3 billion into Italian Treasury bonds linked to inflation, according to an August regulatory filing.
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. 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 percent of competitors in August and 67 percent this year through Sept. 8, according to data compiled by Bloomberg.
"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 Inc., a Summit, New Jersey, firm that advises institutions on investing in mutual funds, said in a telephone interview. "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.
Navigating 'New Normal'
This year is shaping up to be Gross's worst against U.S. total-return funds in data going back to 1995, the earliest year for which Bloomberg has rankings for Pimco's flagship, which opened in May 1987. Gross hasn't lost money in any year since 1999, when Pimco Total Return declined 0.3 percent, including dividends, and trailed 59 percent of the competition, according to data compiled by Bloomberg. In 2010, the fund returned 8.8 percent to beat 82 percent of its peers.
Gross could have altered his holdings since disclosing what he owned as of June 30. The latest data on Pimco's website show the fund's holdings of corporate and non-U.S. sovereign debt at 46 percent of net assets as of July 31, including derivatives. That's unchanged from a month earlier and up from 32 percent in June 2010.
Selling Treasuries and buying corporate debt is a sound long-term strategy that will cause short-term weakness when investors are seeking havens, said Ed Goard, chief investment officer for fixed income at Birmingham, Michigan-based Munder Capital Management, and Michael Krushena, one of the firm's senior portfolio managers.
'Bouts of Volatility'
"There will still be some bouts of volatility with the uncertainty going on in Europe and the unresolved lawsuit issues surrounding mortgages in the banking sector," Krushena said in a telephone interview. "But looking further out than the next two or three months, we think corporate bonds are better investments."