Bill Gross, manager of the world’s biggest bond fund, reduced his holdings of Treasurys for a third consecutive month to the lowest level since October on concern record U.S. debt will lead to inflation.
The proportion of U.S. government and Treasury debt in Pacific Investment Management Co.’s $278 billion Total Return Fund dropped to 20 percent of assets in September from 21 percent the prior month, according to data released on the Newport Beach, California-based company’s website.
Mortgages remained his largest holding at 49 percent. Pimco doesn’t comment directly on monthly changes in its mutual funds.
Gross wrote in his monthly investment commentary last week that the U.S. will no longer be the first destination of global capital in search of safe returns unless fiscal spending and debt growth slows, saying the nation “frequently pleasures itself with budgetary crystal meth.” Mortgages have accounted for 50 percent of the fund holdings since January as Gross correctly bet the Federal Reserve would announce a new round of monetary stimulus using the securities.
“An investor or bond fund or equity fund has to make a bet on reflation or deflation, and recognize that the market power currently rests with central banks,” Gross said during an Oct. 5 radio interview on “Bloomberg Surveillance” with Tom Keene. “‘We are betting at Pimco on reflation. We don’t want to fight the Fed, but we want to be afraid of the inflationary consequences.”
Gross eliminated U.S. government-related debt from the fund in February 2011 and said in March of that year that Treasurys needed to be “exorcised” from portfolios. The fund lost against 70 percent of its peers that year, prompting Gross to capitulate and buy U.S. government debt. The company’s flagship fund has beaten 96 percent of its peers the past year, Bloomberg data show.
Treasurys have returned 1.9 percent this year, while mortgages gained 2.7 percent, according to Bank of America Merrill Lynch indexes.
The Total Return Fund raised its holdings of non-U.S. developed nations’ debt to 11 percent in September from 7 percent in August. Gross kept emerging-market debt to 8 percent and investment-grade credit at 12 percent. High-yield debt was unchanged at 2 percent of holdings.
Gross also kept the Total Return Fund’s net cash-and- equivalent position at negative 6 percent. The fund can have a so-called negative position by using derivatives, futures or by shorting.
The fund gained 12.6 percent over the past year, according to data compiled by Bloomberg. It has returned 9 percent over five years, beating 98 percent of comparable funds.
The fund’s government and Treasury debt category includes fund holdings of U.S. Treasury notes, bonds, futures and inflation-protected securities.
Derivatives are financial obligations whose value is derived from an underlying asset such as debt, stocks or commodities. Futures are agreements to buy or sell assets at a later specific price and date.
Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.82 trillion of assets as of June 30.
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