Pimco is seeking to navigate what Gross, the firm's co- chief investment officer, and Mohamed El-Erian, its chief executive officer and co-CIO, called the "new normal," a future marked by slower growth in developed markets, higher unemployment and more regulation. Gross last year forecast the end of the three-decade rally in bonds, a move that creates strategic challenges for Pimco, whose assets, totaling $1.34 trillion as of June 30, are mostly in fixed-income securities.

Manager of Decade

Pimco Total Return gained 3.9 percent this year through Sept. 8, with dividends, trailing the 6.6 percent advance by its benchmark, the BarCap U.S. Aggregate Total Return Value Index. The fund generated an average annual gain of 7.2 percent in the 10 years ended March 31, 2010, compared with 6.3 percent for the BarCap index, helping Gross earn Morningstar Inc.'s award as fixed-income fund manager of the decade.

Mark Porterfield, a spokesman for Pacific Investment Management Co. in Newport Beach, California, declined to comment.

The main factor in this year's slump was Gross's decision to sell Treasuries, according to Eric Jacobson, a Morningstar analyst. Treasury holdings fell to zero as of February and climbed back to 10 percent as of July 31, according to Pimco's website, compared with 33 percent for the BarCap index. When demand for Treasuries soared last month, Pimco Total Return fell 0.8 percent as the BarCap Index rose 1.5 percent.

'Rare Deviation'

Current yields on 10-year government bonds don't adequately compensate investors for inflation risk, Gross has said publicly. Government efforts to stoke the economy through quantitative easing, including the Federal Reserve's purchase of $600 billion in Treasuries over eight months, artificially repressed U.S. rates, leaving investors with negative real returns when inflation was factored in, he said in a June investment outlook posted on Pimco's website.

"Gross's bearish call on Treasuries was an extremely rare deviation from the Pimco script of a lower-than-consensus forecast" for gross domestic product, inflation and household spending, said William Powers, a former Pimco portfolio manager who now runs Strand Partners, a family office in Los Angeles, and helps manage two real estate funds.

Pimco's solution, as Gross described in his commentary, was to replace Treasuries with corporate debt as well as emerging- market and non-agency mortgage securities. The bonds are less sensitive to interest-rate changes, and thus less affected by quantitative easing, Gross said. That made the debt perceived as riskier a relative bargain, according to Pimco.

'Safer Spread'

"The credit piece," Gross wrote, "is a safer spread than the duration piece."