Jan. 12 (Bloomberg) -- The collapse of the U.S. housing market helped Bill Gross outperform 99 percent of his fund- manager peers over the past five years. Now he’s betting on securities that may benefit from rescue efforts in Washington.

The 64-year-old co-chief investment officer at Pacific Investment Management Co. is urging investors to anticipate which assets will benefit as the government struggles to boost the economy. Last week he recommended municipal bonds, inflation- protected Treasuries and debt the U.S. government plans to buy. In the past six months, Gross bought senior bank debt, agency mortgage securities and preferred shares in financial companies, all before the government did the same.

Gross, who keeps the attention of investors through a combination of performance, monthly commentaries and television appearances, navigated through the worst credit crisis since the Great Depression, said Lawrence Jones, a senior mutual fund analyst with Morningstar Inc. Gross’s $128 billion Total Return Fund, the world’s largest bond fund, returned an average 5.4 percent annually over the past five years, in part by avoiding riskier debt and asset-backed securities as early as 2005.

“If you are beating the competition, some people will idolize you,” said Jones, who is based in Chicago. “And some people will hate you and envy you. That’s a natural thing.” Morningstar named Gross manager of the year three times, including for 2007.

Gross Outperforms

Newport Beach, California-based Pimco’s Total Return Fund rose 4.8 percent in 2008, while corporate and government bond funds tracked by Morningstar declined an average 8.1 percent, according to data compiled by Bloomberg. The $128 billion fund’s five-year return was better than 99 percent of its peers.

Gross, a yoga enthusiast, credits a brainstorm that emerged while meditating with helping him steer clear of the credit market debacle that sent returns on high-risk, high-yield bonds down 26 percent in 2008. Gross wasn’t available for comment, Pimco spokesman Mark Porterfield wrote in an e-mail.

Now, Gross says debt sold by cities and states and some investment-grade companies is attractive. In early 2008, he started buying securities of New York-based JPMorgan Chase & Co. and Charlotte, North Carolina-based Bank of America Corp., viewing them as getting protection from the Federal Reserve.

“It was a bold move,” Jones said. “Now we’re seeing a rebound in various risky assets. Pimco is placing its bets by sticking to companies at the top of the economy’s capital structure.”

Share of Misses

Gross had his share of misses in the past year. Pimco held Lehman Brothers Holdings Inc. bonds in at least 12 of its funds, including the Total Return Fund, and Gross was buying the debt as recently as June 2008, data compiled by Bloomberg show. Lehman filed the world’s biggest bankruptcy in September.

He started loading up on high-quality mortgage-backed securities guaranteed by Freddie Mac and Fannie Mae in 2008, while easing on Treasuries. Last year was the best for U.S. government debt since 1995, with a 14 percent gain, while municipal bonds lost 3.95 percent and Treasury Inflation- Protected Securities, or TIPS, lost 1.13 percent, according to data compiled by Merrill Lynch & Co.

Gross’s decision to back out of a $38 billion bond swap for GMAC LLC debt last year also helped drive his performance. The debt soared as much as 83 percent to 80.5 cents on the dollar after the auto financing company won approval to become a federally backed bank. Other holders participating in the exchange accepted as little as 60 cents on the dollar.

Pimco’s Prominence

Pimco’s prominence provides Gross with opportunities that aren’t available to all his rivals, said Geoff Bobroff, a mutual fund consultant in East Greenwich, Rhode Island. The firm, a unit of Munich-based Allianz SE, has about $790 billion in assets under management.

The Total Return Fund has 81 percent of its assets in mortgage-related securities and 16 percent in investment-grade corporate debt, two of the fund’s biggest positions as of Nov. 30, according to information posted on the company’s Web site.

The fund’s biggest holding as of September was a 6 percent Fannie Mae mortgage bond, according to data compiled by Bloomberg.

“A lot of his comments can be viewed as self-serving,” Bobroff said. “That’s the problem of a manager who is so visible in the marketplace. Is he touting current advice or is he touting what he’s already done?”

Government Jobs

Pimco won a Fed contract in December as one of the four managers of a $500 billion program to purchase mortgage-backed securities. The company was also one of the managers selected to run the Commercial Paper Funding Facility in October.

The firm was a top contender to manage toxic debt under the $700 billion Troubled Asset Relief Program, before Treasury Secretary Henry Paulson in November abandoned the plan to make debt purchases.

“Pimco’s view is simple: shake hands with the government,” Gross wrote in his commentary this month. “Make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond.”

Gross, born in 1944 in the Ohio steel-company town of Middletown, graduated from Duke University with a psychology degree in 1966. He spent three years in the Navy and served in Vietnam.

‘Sun Salutation’

Gross joined Pimco after earning a master of business administration degree from the University of California in Los Angeles in 1971. He began using yoga more than a decade ago and credits his meditation sessions with clearing his head and helping him absorb unexpected news, such as a Fed half-point interest rate cut in January 2001. The news caught him in the middle of a “sun salutation,” which softened the blow, he said at the time.

Gross is also a stamp collector and says he turned $200 into $10,000 while playing blackjack for four months in Las Vegas after college. Forbes magazine ranked him as tied as the 227th wealthiest American in 2008, an improvement from 380th in 2007.

“When you look across the fixed income space, he is the most visible,” Bobroff said. “For the next couple of years, fixed income will be the centerpiece of the marketplace. So Bill is going to get continued prominence.”

To contact the reporters on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net; Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net

Last Updated: January 12, 2009 11:37 EST