PIMCO Total Return Rebounds in 2nd Half
Sunday August 5 10:06 PM ET
By Jonathan Stempel
NEW YORK (Reuters) - Bill Gross' PIMCO Total Return fund is back, benefiting from a big bet on interest rates after an uncharacteristically rough first half of 2001.
The fund's 5-year annualized return is 8.23 percent, ahead of 98 percent of all intermediate-term bond funds, according to fund information service Morningstar Inc.
Returns like that have helped turn the fund, which Gross has managed since 1987, into the largest bond mutual fund, now with $45.7 billion of assets.
Through June, the fund has raked in a net $5.1 billion of new cash this year, more than any other fund, according to Financial Research Corp., a Boston-based consultant.
Yet in the first half of the year, Total Return was outgunned by more than four-fifths of its rivals.
A month later, it has rebounded. Through August 2, the fund is up 5.67 percent in 2001, beating 72 percent of its peers.
``A month ago, everyone was calling and saying, 'What's going on with Bill Gross?''' said Eric Jacobson, a Morningstar senior fixed-income analyst. ``This shows you never want to count Bill Gross out.''
BAD BETS
For a while it seemed Gross, a managing director for Pacific Investment Management Co. in Newport Beach, California, had lost some of his touch.
Gross said in several published interviews he was cool to many corporate bonds, which have performed well all year, and steering clear of junk bonds, many of which also did well.
Meanwhile, Gross' favored sectors -- mortgages, government agency debt and U.S. Treasuries, especially ones with long maturities -- performed just OK, or worse.
``Our position all along this year has been one of a decidedly less-optimistic stance on the economy as a whole,'' said James Keller, a portfolio manager who oversees Treasuries in the Total Return fund.
The result: Total Return's institutional shares returned just 2.58 percent, lagging 82 percent of its peers, according to Morningstar. Between April and June it suffered its first quarterly loss in two years.
The fund even lagged the Lehman Brothers Aggregate Bond Index, considered the broadest measure of the U.S. bond market, by 1.02 percentage points.
No more. The fund is now outperforming the Lehman index by 0.14 percentage point. That 1.16 percentage point pickup against the index in a month is huge; many managers would be happy with just a few tenths.
``What happened in July from a macro standpoint was that companies revised their earnings estimates downward almost 6 percent, one of the sharpest declines ever,'' said Keller. ``This put a cold shower on optimists for the economy, and sparked a strong rally in bonds.''
That helped the fund because Gross bet that interest rates would fall. And they did. Since June 30 the 10-year Treasury yield has fallen to below 5.2 percent from 5.42 percent.
Keller said Total Return ended the first half with a ''duration'' of 5.9 years, near the top of its usual three to six year range. That means prices will rise 5.9 percent for every 1 percent drop in interest rates.
The Lehman index, in contrast, had a duration of 4.75 years, Jacobson said.
``Gross is known for making interest rate plays, and this is a very big play,'' said Jacobson.
SOUR ON ECONOMY
Keller would not discuss what else caused Total Return's July performance, or where the fund is placing its bets now.
But he did say that PIMCO still expects the economy to struggle, and the Federal Reserve (news - web sites) to cut interest rates more, even though the Fed has cut rates six times this year to help revive the economy. A weak economy is usually conducive to low interest rates and better performance by higher-quality bonds.
``There will be a recovery,'' said Keller, ``but it will be a long, slow, painful one.''
Indeed, Jacobson said he last spoke with PIMCO officials a week ago, and they said that Gross' ``attitude toward corporates hasn't changed at all, and that he remains fairly negative.''
He also said investors should not be alarmed by the big bets Gross makes, such as the duration bet.
``The most important thing is, it got the desired results,'' he said. |
