(Bloomberg News) Bill Gross is starting a new version of his Pimco Total Return Fund that will rely less on derivatives and leverage, two of the tools he used to build Total Return into the world's largest mutual fund.
The new fund, identified as Pimco Total Return Fund IV in a February regulatory filing that details the changes, will forgo high-yield debt, borrowing to create leverage, and investing in options. It will serve as an alternative to rather than a replacement for Pimco Total Return, which had $237 billion in assets as of last month.
Gross, the co-founder of Pacific Investment Management Co. in Newport Beach, California, is tinkering with a strategy that helped him beat 98% of rivals over almost 24 years and attract $25.1 billion of new deposits last year. With Gross forecasting an end of the three-decade bond rally, Pimco may be targeting investors who prefer a more conservative approach over the risks associated with excess yields, according to Francois Otieno, a senior fixed-income analyst at Hewitt EnnisKnupp, which advises institutional investors.
"The total return fund is the largest mutual fund in the world, yet very few underlying investors have a clue on how their strategy is executed," Otieno said in an interview from Chicago. "There is an appetite for a more conservative strategy in the marketplace."
Mark Porterfield, a spokesman for Pimco, said the firm can't comment on the new fund while its disclosure documents are being reviewed by the U.S. Securities and Exchange Commission. Gross, 66, didn't respond to telephone calls and e-mails seeking comment.
No Limits
Pimco Total Return has produced average annual returns of 8.42% since starting in May 1987, a performance that ranks it seventh out of 353 bond funds, according to Morningstar Inc., the Chicago-based stock and fund research firm. Its benchmark, the Barclays Capital U.S. Aggregate Index, has had average annual returns of 7.26% from April 30, 1987, through Feb. 28 of this year, according to data compiled by Bloomberg.
The fund benefited from a bond market rally that dates back to the early 1980s, as well as Gross's ability to discern macroeconomic trends and the wide latitude he has to boost returns through complex instruments and strategies. Pimco Total Return may invest "without limitation" in derivatives, including options, futures contracts or swap agreements, according to the fund prospectus.
$2.38 Trillion
Pimco, founded in 1971, has used derivatives as an integral part of its strategies since 1980, primarily to manage risk and take advantage of market inefficiencies, according to a July 2009 report by Hewitt EnnisKnupp. Pimco Total Return's "most unique aspect," according to the report, "is its extensive use of derivative securities."