Pacific Investment Management Co.’s Bill Gross doubled the share of non-U.S. developed market securities while keeping holdings of Treasuries and other U.S. government-related debt unchanged in his flagship fund in September as the Federal Reserve maintained bond buying.
The proportion of U.S. government and related debt in the $250 billion Total Return Fund remained at 35 percent, data on Pimco’s website show. Developed-market paper rose to 4 percent in September from 2 percent in August. The Newport Beach, California-based company doesn’t comment directly on monthly changes in holdings or specific types of securities within a market sector.
Gross has recommended investors purchase shorter-term Treasuries as the Fed weighs tapering its bond buying under the quantitative-easing stimulus strategy and the market underestimates how long it will then take the central bank to begin raising interest rates. He also said last week the political “theatrics” in Washington over the U.S. debt ceiling will be resolved without a default.
“What we’ve done is to buy and hold Treasuries, but at the front end of the curve,” Gross said in a Bloomberg Television interview on Oct. 1. “Buy three-, four-, or five-year Treasuries that incorporate that mispricing in terms of Fed policy rates going forward. Don’t buy 30s, don’t buy 10s, because those are inflation-sensitive.”
Treasuries returned 0.9 percent in September, the first monthly gain since April, according to the Bloomberg U.S. Treasury Bond Index.
Gross reduced the Total Return Fund’s holding of mortgage securities to 35 percent in September, from 36 percent in August, the company’s website showed. Mortgage securities were the fund’s biggest holding in August, with U.S. government-related debt No. 2.
U.S. credit, which includes investment-grade and high-yield securities, was unchanged at 9 percent. The category was previously separated into two sectors called investment grade and high yield.
The Total Return Fund’s emerging-market debt holding was at 6 percent, the same as in August, while money market and net cash equivalents fell to 6 percent last month, from 7 percent.
Over the past five years, the Total Return Fund has returned 7.88 percent, outperforming 84 percent of competitors. It gained 2.46 percent over the past month, outperforming 95 percent of its peers, according to data compiled by Bloomberg. It has lost investors 1.84 percent this year, outperforming just 44 percent of its peers, according to the data.
The fund’s government and Treasury debt category includes holdings of U.S. Treasury notes, bonds, agency debt, interest-rate swaps and inflation-protected securities.
Investors should bet that when the Fed has concluded its $85 billion in monthly purchases of Treasuries and mortgage bonds, interest rates “will then stay lower than expected for a long, long time,” he said. Investors should wager against Fed forecasts that the key rate will be 1 percent higher by late 2015 and jump another 1 percent by late 2016, he said. The Fed has kept the rate at zero to 0.25 percent since 2008.
There’s a 30 percent chance policy makers will increase the fed-funds rate target to at least 0.5 percent by January 2015, according to data compiled by Bloomberg from futures contracts. The odds were 68 percent a month ago amid speculation an end to the program would be followed later by a rate boost.
The Fed refrained on Sept. 18 from slowing purchases, saying more evidence of economic gains was needed.
Pimco had an estimated $6.5 billion in net redemptions last month across its U.S. mutual funds, according to the Chicago-based research firm Morningstar Inc. Redemptions included an estimated $5.4 billion from the Total Return Fund, Morningstar said. Investors have pulled money from Pimco’s mutual funds every month since June, when clients removed a record $14.5 billion, according to Morningstar.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.97 trillion in assets as of June 30.