Gross Loses World’s Largest Mutual Fund Title to Vanguard

Nov. 4 (Bloomberg) --- Bill Gross no longer runs the world’s largest mutual fund.

Gross’s Pimco Total Return Fund (PTTRX) has shrunk by $37.5 billion since the start of this year, ending last month with $247.9 billion in assets, according to data provided by Pacific Investment Management Co. in Newport Beach, California, and compiled by Bloomberg. The Vanguard Total Stock Market Index Fund (VTSMX) ended October with $251 billion, Vanguard Group Inc. spokesman John Woerth wrote in an e-mail, taking the top spot.

Investors are pulling money out of traditional fixed-income funds in anticipation that the three-decade rally in bonds is ending, and adding to stock funds, particularly low-cost index funds, as the bull market in U.S. equities is in its fifth year. Pimco Total Return, which became the biggest mutual fund in 2008, is on track to have the worst redemptions ever this year, losing $4.4 billion in October and $33.2 billion in 2013, according to estimates from Morningstar Inc. (MORN)

“This is part of the great rotation from bonds to stocks that is overdue,” Michael Mullaney, who oversees more than $10 billion as Boston-based chief investment officer for Fiduciary Trust Co., said in a telephone interview. “The best of bond returns is behind us.”

Photographer: Andrew Harrer/Bloomberg

Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO). Close

Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO).

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Photographer: Andrew Harrer/Bloomberg

Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO).

Michael Reid, a spokesman for Pimco, declined to comment in a telephone interview. Gross and Mohamed El-Erian, the co-chief investment officers of Pimco, didn’t return e-mailed requests for comment.

Bond Redemptions

Investors started to flee bonds this year on concerns that the Federal Reserve will taper its bond-buying program, which could lead to higher interest rates and a decline in fixed-income prices. Stocks have rallied on rising corporate earnings and forecasts that the U.S. economy will accelerate in 2014.

U.S. bond mutual funds saw net redemptions of $117 billion in the four months through September, while stock funds received $35 billion, according to the Investment Company Institute in Washington. The Vanguard index fund attracted $14.5 billion in contributions this year, including $2.1 billion in October, according to estimates from Chicago-based Morningstar.

Gross’ fund more than doubled in size between 2008 and 2012 as investors deserted stock funds after the financial crisis for the perceived safety of bonds. The fund attracted $50.1 billion in 2009 and $22.6 billion in 2012, Morningstar data show.

Pimco Total Return gained 4.8 percent in 2008 as Gross sidestepped the collapse of the housing market. The Standard & Poor’s 500 Index fell 37 percent that year, including reinvested dividends.

The fund trailed 74 percent of rivals in 2011 as Gross missed a rally in Treasuries. Gross, in a letter to clients, called the year “a stinker.”

Trailing Peers

Pimco Total Return lagged behind 56 percent of peers this year and beat 77 percent over the past five years, according to data compiled by Bloomberg.

The Vanguard fund was buoyed by a 27 percent return in the CRSP US Total Market Index this year, a benchmark that includes stocks of different market capitalizations.

Vanguard, the biggest U.S. mutual-fund firm, with almost $2.4 trillion in U.S. fund assets, has grown as the champion of indexing. Index funds represent 63 percent of Vanguard assets, Woerth said. Company founder John Bogle argued that most investors can’t beat the market and advised them to buy low-cost funds that track indexes. Vanguard also offers funds in which the managers pick stocks and bonds.

Vanguard Total Stock Market Index Fund more than tripled in size since the end of 2008.

Indexing has also grown with the popularity of exchange-traded funds, nearly all of which mimic indexes and can be traded throughout the day like stocks. Vanguard is the third largest U.S. provider of ETFs, behind Boston-based State Street Corp. (STT) and New York-based BlackRock Inc. (BLK), Morningstar data show.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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