Pimco Draws About $1 Billion a Week, Returns of 10% Unlikely, Gross Says
Pacific Investment Management Co., the world’s largest manager of bond funds, is attracting almost $1 billion a week from investors, according to Bill Gross, the firm’s co-founder and co-chief investment officer.
Gross’s $234 billion Total Return Fund, the biggest bond fund, has benefitted this year as interest rates declined and investors questioned the sustainability of the global economic recovery. The fund returned 13 percent in the past 12 months, beating 64 percent of its peers, Bloomberg data show. It has gained 1.24 percent this month, a performance outpacing 68 percent of competitors.
Returns of 10 percent or higher are unlikely to be duplicated in what Pimco has termed the new normal, a period in which deleveraging, re-regulation and de-globalization will lead to slower growth and investment below historical averages, Gross said today in a Bloomberg Radio’s “On The Economy” interview with Tom Keene. Gross has said investors should be prepared for returns of around 4 percent to 5 percent from bonds and stocks over the next several years.
“The only way to do that would be through a Japanese deflation in which Treasury prices continue to move higher,” Gross said. “What we really try to do is to analyze what our new normal means for interest rates and for the shape of yield curves, not just in the U.S. but globally.”
Treasuries, Corporates
The fund’s Sharpe ratio averaged 4.1 this year. The average for comparable funds is 3.56 and the index average is 2.76. A higher Sharpe ratio indicates better risk-adjusted returns.
Pimco is using the investor proceeds to buy Treasuries at the government’s weekly and monthly auctions and is also investing in newly issued corporate securities, Gross said.
While yields on 10-year Treasuries are unlikely to revisit the all-time low of 2.04 percent reached Dec. 18, 2008, interest rates will remain low with the Federal Reserve keeping its target rate for overnight loans between banks at a record low range of zero to 0.25 percent for two to three years, Gross said. He also prefers the debt of emerging economies such as Mexico and Brazil, rather than high-yielding securities of Greece and Spain.
Gross boosted holdings of government-related debt to the highest level in eight months in June as the U.S. recovery showed signs of waning. The Total Return Fund’s investment in the debt was increased to 63 percent of assets in June, from 51 percent in the previous month. Emerging-market debt was raised to 10 percent, breaking the 9 percent record set last month.
Yield Curve
Pimco’s U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the firm’s website.
“As long as short rates stay at zero or close to zero, and that’s the key caveat, then an investor can make money simply by buying 5-year Treasuries, watching them roll down the curve to four years and then popping back up to five years again,” Gross said.
Pimco, which has been synonymous with bonds for almost four decades, in the past year has created an equity mutual fund and a unit to invest in hedge, real estate and buyout funds. Newport Beach, California-based Pimco has also started 10 exchange- traded funds.
Pimco, a unit of Munich-based insurer Allianz SE, managed $1.07 trillion of assets as of March 31.
To contact the reporter on this story: Alex Kowalski in New York at akowalski13@bloomberg.net
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