Gross’s Total Return Among Worst Performing Amid SelloffCharles Stein and Alexis Leondis
Bill Gross’s $285 billion Pimco Total Return Fund led declines among the most-popular bond mutual funds after the Federal Reserve sparked a global selloff by indicating it may start reducing asset purchases.
Gross’s flagship, the world’s largest mutual fund, lost 1.6 percent from June 18 through June 20, the day after the Fed outlined its exit scenario, and was down 2.8 percent for the year, the worst of 19 U.S. total return funds with at least $2 billion in assets, according to data compiled by Bloomberg. The $4.2 billion Bernstein Intermediate Duration Portfolio was the third-worst performer this year, after Pimco Total Return and a related fund, falling 2.7 percent.
“Investors have to prepare themselves for the reality of a world in which the Fed may not be buying bonds,” Jeff Tjornehoj, an analyst with Denver-based Lipper, said in a telephone interview. “Mr. Gross has acknowledged that bonds could be in for a rough ride.”
Bonds along with stock and commodities slumped after Fed Chairman Ben Bernanke put investors on notice that the central bank is prepared to begin phasing out one of the most aggressive easing programs in its century-long history later this year. Ten-year Treasury yields climbed to a 22-month high yesterday, worsening a selloff that started last month.
Bond-fund managers from Gross, co-founder of Newport Beach, California-based Pacific Investment Management Co., to Jeffrey Gundlach at DoubleLine Capital LP have said now is a bad time to sell bonds because the economy isn’t strong enough to sustain higher borrowing costs. Gross, who trailed peers in 2011 after dumping Treasuries before they rallied, said this week that investors who are selling U.S. government debt now are missing the influence of inflation on the central bank’s decisions.
“The market basically has misinterpreted the growth and unemployment targets while leaving out inflation targets going forward,” Gross said in an interview with Trish Regan and Adam Johnson following Bernanke’s comments.
Bond funds worldwide have experienced withdrawals this month after Bernanke told Congress on May 22 that the central bank’s policy-setting board could start reducing its bond purchases in “its next few meetings” if the U.S. employment outlook shows sustained improvement.
Investors pulled the most ever from bond funds in the week ended June 12, according to EPFR Global, a Cambridge, Massachusetts-based firm. The funds lost $14.5 billion to redemptions last week and $12.5 billion the week before, EPFR reported.
Investors pulled an estimated $1.32 billion from Gross’s fund in May, according to Chicago-based Morningstar Inc., its first withdrawals since 2011. The $4.7 billion Pimco Total Return Exchange-Traded Fund has seen redemptions of $487 million since May 15, according to data from San Francisco-based IndexUniverse.
Mark Porterfield, a spokesman for Pimco, said Gross wasn’t available to comment.
The total return category includes funds that invest in intermediate-term, investment-grade bonds -- core holdings for investors seeking to put money into fixed income -- and excludes municipal bond funds.
The $4.8 billion FPA New Income Fund did best this year, gaining 0.9 percent, one of just three funds to post gains. FPA New Income, run by Thomas Atteberry, has lost 0.2 percent since June 18.
Gundlach’s $40 billion DoubleLine Total Return Bond Fund has lost 1 percent since June 18 and gained 0.2 percent for the year, second-best after FPA New Income. Tad Rivelle’s $9.1 billion TCW Total Return Bond Fund has fallen 1.1 percent since June 18 and is down 0.1 percent in 2013.
Gundlach said Treasuries will outperform stocks and commodities over the coming months because the latter two will slump more if yields continue to rise. The reason DoubleLine Total Return is outperforming Pimco Total Return Fund despite their managers’ similar outlooks on Treasuries is that the DoubleLine fund has a shorter duration and less interest rate risk, Gundlach said.
“I think Treasuries will be the best-performing asset class for the next few months,” Gundlach said in a telephone interview yesterday. “The place that’s the best is the place everybody hated.”
Bernanke said the central bank could start reducing bond purchases later this year and end them in the middle of 2014 if the economy continues to improve as the central bank forecasts. The U.S. unemployment rate will fall to 6.5 percent to 6.8 percent by the end of 2014, Fed officials predicted. U.S. central bankers in December linked changes in the benchmark borrowing cost to the outlook for employment and prices.
“The FOMC was more hawkish than we had expected,” Goldman Sachs Group Inc. economists Jan Hatzius and Sven Jari Stehn wrote in a research note.
Gross and his colleagues have been skeptical about the U.S. economy’s potential for growth since the financial crisis. Gross said last week the Fed won’t raise rates in a “meaningful way” for at least the next two years and investors should be cautious when it comes to all risk assets.
As interest rates have climbed over the past two months, Gross has recommended buying U.S. Treasuries. In a Twitter posting June 18, he recommended buying five-year Treasuries and earlier, on June 12, he called intermediate Treasuries with yields above 2 percent a “buy.” The “Fed’s not raising interest rates for years,” he said.
Gross’s call on Treasuries hasn’t worked out so far. The 10-year Treasury yield climbed six basis points to 2.41 percent at 5 p.m. in New York and reached 2.47 percent earlier yesterday, the highest since August 2011, according to Bloomberg Bond Trader prices. Bonds decline in price as rates climb.
Gross cut the holdings of Treasuries in Pimco Total Return Fund to 37 percent in May from 39 percent in April, a level that was the highest since July 2010, according to data on Pimco’s website. U.S. Treasuries have lost 2.3 percent this year through yesterday, according to Bank of America Merrill Lynch indexes. The Barclays U.S. Aggregate Index, among the most widely used fixed-income benchmarks, has declined 2.3 percent this year and has fallen 1.2 percent since June 18.
Gundlach’s DoubleLine fund had 4.8 percent of its money in Treasuries and 15 percent in cash as of May 31. The majority of the fund is invested in mortgage-backed securities. TCW Total Return’s largest allocation was to mortgage-backed securities at 73 percent followed by 11 percent in U.S. Treasuries as of March 31, TCW data show.
“When there’s volatility with credit, in the short term, Treasuries aren’t a bad place to hide out, but from a long-term perspective, we don’t think there’s much value at all in Treasuries,” said Bryan Whalen, who co-manages TCW Total Return along with Rivelle.
Pimco Total Return also has a longer duration than rival funds. Duration is a measure of sensitivity to changes in interest rates. Gross’s fund had a duration of 5.2 years as of May 31, compared with 3.2 years for DoubleLine Total Return. TCW Total Return Bond Fund’s duration was 3.3 years as of March 31.
Gross, who has been called “The Bond King” and was named fixed-income manager of the decade in January 2010 by Morningstar, made a bad call on Treasuries in 2011. His fund lost an estimated $5 billion to withdrawals as he endured what he termed “a stinker” after eliminating U.S. Treasuries earlier in the year and missing a rally when investors rushed to the safety of government-backed debt.
“We simply think the real economy won’t follow the path that the Fed thinks it will because the Fed is based on a cyclical model that’s inappropriate,” Gross said in a Bloomberg radio interview yesterday with Tom Keene.