Bill Gross, manager of the world’s biggest bond fund, is proving once again that he’s willing to suffer short-term pain for long-term gain.
The billionaire investor and co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co. has seen his flagship Total Return Fund gain 2.52 percent since eliminating U.S. government debt from his holdings in February, and betting against the securities, foregoing an additional 3.1 percent in Treasury returns in the last three months, according to data compiled by Bloomberg. The fund beat just 55 percent of its peers in the past month, the data show.
While that may seem disappointing for a manager who has outperformed 99 percent of his rivals the past five years, history shows that Gross’s calls often seem wrong before proving accurate and generating above-average returns for investors. In 2007, his fund lost about 0.8 percent through June, trailing the performance of 80 percent of comparable funds before rebounding to beat 99 percent of them for the year as the Federal Reserve began to lower interest rates, as he predicted.
“I certainly don’t have any regrets.” Gross said of his current strategy in an interview yesterday in Chicago. “We’re beating the market by 50 basis points. We’re not completely satisfied but it’s not the negative headline that one sees.”
Gross has had his share of misses. Pimco held bonds of Lehman Brothers Holdings Inc., in at least 12 of its funds, including the Total Return Fund, before the investment bank filed bankruptcy in September 2008. Gross was buying the debt as recently as June 2008.
The Treasury market up to seven or eight years is negative in terms of real interest rates, and that’s not a positive for savers,” Gross said in an interview on June 3 with Tom Keene on Bloomberg Radio. “To the extent they can risk a little bit of their capital, then there are alternatives.”
Investors should increase holdings of corporates, mortgages and other country bonds with better balance sheets than the U.S., such as Germany, Canada and Brazil that have “half the debt,” Gross said June 3, adding that those bonds are “better opportunities” because they have higher yields and are safer credits.
Gross has been betting against U.S. debt through short sales, in which the Total Return Fund would borrow and then sell government bonds, hoping to profit by repurchasing the securities at a lower price in the future. The fund’s annual report showed that, as of March 31, it had sold short about $2.2 billion of Treasuries that mature in about 10 years and $5.8 billion of agency debt that comes due in 2041.
In addition, the fund also entered into 10- and 30-year interest-rate swaps with a face value of about $15.2 billion during the fourth quarter of 2010 and first quarter of 2011, according to filings. In order to obtain the contracts, which are the equivalent of betting against Treasuries, the Total Return Fund paid upfront premiums totaling about $331 million to 12 Wall Street banks, the filing shows.
While the swaps are costly for the fund, given that it must pay out more than it takes in under the contracts, Gross would reap big profits from the trades should long-term rates rise, causing Treasuries to tumble. Conversely, a decline in long-term rates would punish the fund’s returns.
The billionaire investor and co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co. has seen his flagship Total Return Fund gain 2.52 percent since eliminating U.S. government debt from his holdings in February, and betting against the securities, foregoing an additional 3.1 percent in Treasury returns in the last three months, according to data compiled by Bloomberg. The fund beat just 55 percent of its peers in the past month, the data show.
While that may seem disappointing for a manager who has outperformed 99 percent of his rivals the past five years, history shows that Gross’s calls often seem wrong before proving accurate and generating above-average returns for investors. In 2007, his fund lost about 0.8 percent through June, trailing the performance of 80 percent of comparable funds before rebounding to beat 99 percent of them for the year as the Federal Reserve began to lower interest rates, as he predicted.
“I certainly don’t have any regrets.” Gross said of his current strategy in an interview yesterday in Chicago. “We’re beating the market by 50 basis points. We’re not completely satisfied but it’s not the negative headline that one sees.”
Gross has had his share of misses. Pimco held bonds of Lehman Brothers Holdings Inc., in at least 12 of its funds, including the Total Return Fund, before the investment bank filed bankruptcy in September 2008. Gross was buying the debt as recently as June 2008.
The Treasury market up to seven or eight years is negative in terms of real interest rates, and that’s not a positive for savers,” Gross said in an interview on June 3 with Tom Keene on Bloomberg Radio. “To the extent they can risk a little bit of their capital, then there are alternatives.”
Investors should increase holdings of corporates, mortgages and other country bonds with better balance sheets than the U.S., such as Germany, Canada and Brazil that have “half the debt,” Gross said June 3, adding that those bonds are “better opportunities” because they have higher yields and are safer credits.
Gross has been betting against U.S. debt through short sales, in which the Total Return Fund would borrow and then sell government bonds, hoping to profit by repurchasing the securities at a lower price in the future. The fund’s annual report showed that, as of March 31, it had sold short about $2.2 billion of Treasuries that mature in about 10 years and $5.8 billion of agency debt that comes due in 2041.
In addition, the fund also entered into 10- and 30-year interest-rate swaps with a face value of about $15.2 billion during the fourth quarter of 2010 and first quarter of 2011, according to filings. In order to obtain the contracts, which are the equivalent of betting against Treasuries, the Total Return Fund paid upfront premiums totaling about $331 million to 12 Wall Street banks, the filing shows.
While the swaps are costly for the fund, given that it must pay out more than it takes in under the contracts, Gross would reap big profits from the trades should long-term rates rise, causing Treasuries to tumble. Conversely, a decline in long-term rates would punish the fund’s returns.
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