Bill Gross saw investors pull $5 billion out of his Pimco Total Return Fund last year when a bad bet against Treasury bonds led the fund to underperform its peers. Now he’s reversing course.
Gross increased the proportion of U.S. government debt in the $244 billion Total Return Fund to 30 percent of assets in December, the highest since November 2010, according to a report placed on the company’s website on Jan. 11. Newport Beach (Calif.)-based Pimco doesn’t comment directly on monthly changes in its portfolio holdings.
Gross eliminated his holdings of Treasuries in February 2011 and used derivatives such as swaps to wager that prices of Treasuries would fall. That strategy backfired when Treasuries had their biggest rally since 2008 last year, returning 9.8 percent. Total Return earned 4.16 percent in 2011, trailing 66 percent of similar funds, according to data compiled by Bloomberg. Gross apologized for the fund’s weak performance in a letter to investors titled “Mea Culpa” issued in October. By November, he had boosted U.S. government debt to 23 percent of the portfolio.
Total Return has also been building its muni bond stake. Municipal securities accounted for 5 percent, or $12.2 billion, of its holdings in November. That’s up from 4 percent in the 13 previous months and the biggest allocation since at least 2006, according to an analysis of the figures by Bloomberg. Muni bonds returned 11.2 percent last year, according to Bank of America Merrill Lynch indexes, outperforming Treasuries, stocks, and commodities. “Our portfolio managers around the country felt that it was an area that was worth taking a look at and investing in,” says Joe Deane, head of municipal-bond investments at Pimco. “We just felt that on an overall relative-value basis, that it was really one of the most attractive asset classes out there.” Pimco was able to take part in 2011’s rally even though it bought munis late in the year, says Deane, who joined in July after co-heading the tax-exempt department at Western Asset Management. “We got an awful lot of it in the fourth quarter.”
State and local borrowers in the $3.7 trillion municipal market withstood the lengthiest recession since the 1930s as they cut spending to close deficits and tax revenue rose for eight consecutive quarters to Sept. 30, the longest string of gains since 2008, the U.S. Census Bureau said on Dec. 20. The “hundreds of billions of dollars” of defaults predicted by bank analyst Meredith Whitney in 2010 didn’t happen.
Low yields on Treasuries make munis especially attractive. “Their yields of 5 to 6 percent are near historically high ratios to Treasuries,” Gross said in his January investment outlook. “They do, however, entail risk—not only volatility but occasional default risk.” That’s not a prediction of widespread defaults as suggested by Whitney, Gross wrote, “but simply a recognition that you usually get what you pay for.”