Pimco’s Gross Shifts Family Holdings in Bond Market Rout
Pacific Investment Management Co.’s William Gross, the billionaire who runs the world’s largest mutual fund (PCN), is re-jiggering family investments in Pimco bond funds that have been beaten down by rising interest rates.
Gross paid about $4.3 million to buy shares of Pimco Corporate & Income Strategy Fund from June 10 to June 12, according to filings with the U.S. Securities and Exchange Commission. He raised $3.2 million in May and June by selling shares of Pimco Income Strategy Fund, Pimco Municipal Income Fund II and Pimco Corporate & Income Opportunity Fund (PTY), separate filings show.
All of the investments are in closed-end funds that traded at stiff premiums to the value of their assets, in part because they offered high payouts to buyers starved for yield, said Cecilia Gondor, chief investment officer at Thomas J. Herzfeld Advisors Inc. in Miami Beach, Florida. Closed-end funds have sold off since May, reflecting investor concern that the underlying value of the bonds they hold will suffer should the U.S. Federal Reserve pare its efforts to keep interest rates low, Gondor said.
“In May, the first wave of selling was most evident among the Pimco funds trading at big premiums,” Gondor said. “It has now been exacerbated by Ben Bernanke’s recent confirmation that the Fed has been talking about tapering off some of the stimulus.”
Bernanke, the Fed’s chairman, told reporters on June 19 that the central bank will probably taper its $85 billion in monthly bond buying later in 2013, and halt the purchases around the middle of next year, if the U.S. economy performs in line with Fed projections. The yield on the benchmark 10-year Treasury (USGG10YR) note jumped 17 basis points to 2.35 percent, the largest one-day increase since October 2011. A basis point is one hundredth of a percentage point.
Having helped found Pimco in 1971, Gross has historically been a buyer rather than a seller of its funds. In addition to running the flagship Pimco Total Return Fund (PTTRX), which has $285 billion in assets, he also manages several of the firm’s closed-end funds, including the three income funds he traded in May and June.
Last month, Gross disclosed that family trusts he controls sold 79,000 Pimco Corporate & Income Opportunity shares on May 17 at about $21 each. The $1.3 billion fund now trades at $18.75 a share.
From June 10 to June 12, Gross and his family acquired 259,164 shares of the Pimco Corporate & Income Strategy Fund, paying $16.70 to $16.75 a share. And in filings yesterday with the SEC, Gross disclosed that the family trusts had sold shares of the Pimco Municipal Income Fund II and Pimco Income Strategy on June 18 and June 19.
The three non-municipal funds have similar strategies, allocations among different types of bonds, and durations, a measure of sensitivity to changes in interest rates. The premiums on all four funds had shrunk during the bond market’s sell-off.
Closed-end funds issue a fixed number of shares that then trade on an exchange. When the funds are in demand, their market prices can exceed the net value of their assets, creating a large premium; when they’re out of favor, premiums can shrink and the funds can trade at a discount to the value of their holdings.
When Gross sold part of his family stake in Pimco Corporate & Income Opportunity, its shares were trading at a 21 percent premium to its net asset value of $17.26 a share, according to data compiled by Bloomberg. By June 12, that premium had shrunk to 4 percent. The spread has widened to about 15 percent.
“Retail investors looking for income have been gravitating toward the Pimco funds because they see Mr. Gross on TV everyday and they have a lot of confidence in Pimco,” Gondor said. “On the other hand, they have been fearful of what will happen when interest rates rise.”
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