Gross’s Reversal Too Late as Total Return Headed for Redemptions

Pacific Investment Management Co.’s Bill Gross
Pacific Investment Management Co.’s Bill Gross. Photographer: Andrew Harrer/Bloomberg

Bill Gross, manager of the world’s biggest mutual fund, reversed course after missing a Treasuries rally in early 2011 by raising his stake in the debt to the most in a year. The reversal may have come too late to prevent the Total Return Fund’s first year of redemptions.

Investors pulled $348 million from the bond fund in November, bringing withdrawals in 2011 to $2.3 billion and putting the fund on track for its first calendar year of net redemptions since inception in 1987, according to data compiled by research firm Lipper. The $241 billion fund, run by Pacific Investment Management Co. in Newport Beach, California, returned 3.6 percent this year through yesterday, trailing 71 percent of competing funds, according to data compiled by Bloomberg.

“The moment he stumbled it was going to be a big story,” Eric Jacobson, director of fixed-income research at research firm Morningstar Inc. in Chicago. “If it quickly becomes conventional wisdom, it can become a bigger problem for them, but notionally the amount of withdrawals is not that much.”

Gross, in an October letter to clients titled “Mea Culpa,” called 2011 a “stinker” of a year after he shunned Treasuries in the first half and missed a rally as investors rushed to the safety of government-backed debt amid the European sovereign-debt crisis. After eliminating Treasuries from the portfolio in February, Gross has piled back into the securities, bringing government and Treasury debt to 23 percent as of Nov. 30.

Avoiding Risk

Treasuries have returned 9.6 percent this year through December 20, in what would be their best year since the financial crisis of 2008, according to Bank of America Merrill Lynch indexes. Investors may continue to avoid risk in the first part of 2012, Pimco’s Chief Executive Officer Mohamed El-Erian, who shares the title of chief investment officer with Gross, said in a Bloomberg Television interview on Dec. 19.

Mark Porterfield, a Pimco spokesman, said the firm doesn’t comment on client deposits and redemptions.

The Pimco Total Return Fund had redemptions last month even as investors put $15.7 billion into U.S. taxable bond funds in the four weeks ending Nov. 30, according to data from the Investment Company Institute in Washington.

The Wall Street Journal reported earlier that the fund was on track for its first year of redemptions since inception.

Pushing Into Stocks

Withdrawals from Total Return this year were largely concentrated in the first quarter, when clients pulled $6.7 billion. The fund had $25.7 billion in net deposits in 2010 and enjoyed its best year in 2009, taking in $51.4 billion, according to Lipper.

Pimco, known for its bond funds for almost four decades, has sought to reduce its reliance on fixed-income by pushing into stock funds, exchange-traded funds and assets that can preserve their value in rising and falling markets. It hired former U.S. Treasury official Neel Kashkari in December 2009 to oversee an expansion into equity funds.

The fund’s performance this year is Gross’s worst relative to peers since at least 1995, the earliest year for which Bloomberg has rankings for the fund. In the five years ending Dec. 20, the fund advanced 7.9 percent to beat 98 percent of competing funds, according to data compiled by Bloomberg.

Gross’s performance has bounced back in the past month when he beat 98 percent of peers, helped by a rebound in riskier assets such as corporate credit and non-U.S. holdings.

Total Return has 43 percent of assets in mortgage-backed securities, 20 percent in non-U.S. developed markets and 10 percent in emerging market bonds, according to data posted on its website.

Pimco, owned by Munich-based insurer Allianz SE, manages about $1.3 trillion in assets.

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