I had the opportunity to meet with Bill Gross, founder and co-chief investment officer at Pimco and the manager behind the world's largest bond fund, for the 2012 ETF Virtual Summit.
Pimco recently announced the launch of an exchange-traded fund offshoot of his flagship Total Return Bond fund on March 1, which he expects to someday dominate the ETF landscape. "We're proud of our relationships with retail firms in terms of distribution," Gross said.
The popular and industry stalwart Pimco Total Return Bond Fund will be celebrating its 25th anniversary this year after gathering $244.1 billion in assets spread across various share classes and providing more than 8% in annual returns over its lifespan.
Gross believes that ETFs have certain "advantages" and allow small investors the opportunity to easily access Pimco bond strategies. The ETF wrapper is something that fits nicely with the company's Total Return Fund, Gross added. Not to mention that Pimco will bring a reputable track record to the active ETF space.
Commenting on the market outlook, Gross said that Pimco projects further global slowdowns as banks and consumers continue to delever. Developed countries are sitting on too much debt and governments are develering in an attempt to get their balance sheets in order.
Gross singles out European assets to watch out for, as the region still suffers from uncertainty and risk associated with the ongoing debt crisis. On the other hand, he thinks the U.S., Canada and emerging countries like Brazil and Mexico have relatively better balance sheets. Investors will still want to stay in conservative assets going into 2012 as capital preservation should be their main focus, he added.
"It's not a double-digit year," Gross said. "It's a 2% to 5% year."
The Total Return ETF
The Pimco Total Return ETF (Expected ticker: TRXT) will be actively managed and hold a diversified portfolio of fixed-income instruments, such as bonds, debt securities and other similar instruments issued by U.S. and non-U.S. public- or private-sector entities, with varying maturities. TRXT will have an expense ratio of 0.55%. The fund is slated to be one of the cheapest actively managed ETFs available, as most active ETF products have expense ratios above 1%.
The actively managed ETF space has fallen behind, even as the ETF business expands above $1 trillion in assets. Most fund providers are hesitant to show full disclosure on their asset holdings since it could lead to front-running or others trying to mimic their portfolio management strategies. However, actively managed bond ETFs are harder to replicate because of the number of bond holdings needed to achieve a target strategy.
TRXT also looks to be cheaper than the comparable Pimco Total Return A (PTTAX) fund, which has an expense ratio of 0.90%. If the ETF does as well as, if not better than, the Total Return Fund, we might see robust growth in assets under the ETF version of the fund, even at the expense of the original bond fund. However, the Total Return ETF will not be able to invest in derivatives, specifically in futures, options and swaps. Consequently, the ETF manager will be limited in the ways he might be able to seek alpha.
Additionally, it should be noted that the Pimco Total Return Fund share option available to institutional investors levies a 0.46% expense ratio - institutional investors get preferential treatment because they are viewed as the large wholesale customers that move money in bulk. In this instance, investors of the Total Return ETF will be paying expenses that are almost comparable to that of institutional investors.
If TRXT is to be an ETF version of the Total Return Fund, we can expect the ETF to act similarly to the original fund. Currently, the Pimco Total Return Fund is focused on nonindex plays, with a lower allocation to government bonds and stated duration of around 7.1 years. The institutional class shares only eked out a slight positive gain in 2011, largely because the fund missed out on the rally in Treasuries - Gross shied away from Treasuries because he feared valuations were too high.