Bill Gross: Harbor Bond Fund

He's sometimes said to be the most influential fund manager in the world, but Gross isn't resting on his laurels

You can tell Bill Gross has changed yoga instructors when he talks about the bond market. The 61-year-old manager of the Harbor Bond Fund, who leaves his desk at Pimco Invesments for a mid-morning, 90-minute workout, recently began working with a yoga teacher who focuses on deep inhalations.

Now Gross is breathing a bit easier about bonds. He's convinced 10-year U.S. bond yields will only climb to 5% (they're already at 4.8%). Falling housing prices should help keep pressure off the bond market, too. To draw a bead on the real estate market, Gross dispatched Pimco employees disguised as buyers to several real estate markets across the country for the past five months. "The house has been used as an ATM machine for four to five years now, but with housing slowing down, the [Federal Reserve] can stop raising rates at close to these levels," he says.

Seeing an end to rising interest rates, Gross has shifted out of European government bonds. In fact, he's currently short-selling European bonds, and Japanese bonds, too. He's also focusing on short-term U.S. debt, since the yield curve is so flat.

TALE OF TWO FUNDS.

  "You can't pick up yield by extending out on yield curve," Gross notes. Thus, more than 60% of the Harbor fund is invested in short-term mortgage securities, mainly those issued by Fannie Mae and Freddie Mac, which yield about one percentage point above comparable Treasuries yet still carry a top-notch credit rating.

For nearly a decade, Gross has been subadvising Harbor Bond, which is very similar in scope to his massive $93 billion Pimco Total Return fund, although it has just $2 billion in assets. "There's not much difference at all, other than size and fees," he says.

Harbor Bond's expense ratio is 0.83%, while Pimco Total Return's A shares are 0.90%. The Pimco fund has a load, while Harbor Bond doesn't have a sales charge. The funds both hold about 600 securities, which are selected for duration (a measure of a bond's sensitivity to interest rate moves), credit quality, sector allocation, and domestic or international exposure.

Because Gross controls more than $200 billion worth of debt, he's considered to be the most influential bond fund manager in the world, and his monthly investment outlook is a must-read for bond-market participants. Last October, Pimco's marketing folks convinced him to deliver the outlook in a podcast format. Much to Gross's surprise, it gets 5,000 downloads a month. Not bad for a guy who doesn't even own an iPod.

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