Bill Gross’s $285 billion Pimco Total Return Fund was leading losses 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 percent Wednesday and was down 2.2 percent for the year through Wednesday the worst of 19 U.S. total return funds with at least $2 billion in assets, according to data compiled by Bloomberg. The $4.8 billion FPA New Income Fund did best this year, gaining 1 percent, one of just four funds to post gains. FPA New Income, run by Thomas Atteberry, lost 0.1 percent Wednesday.
“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 Wednesday 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 Thursday, 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 Treasurys before they rallied, said Wednesday 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 Wednesday on Bloomberg Television’s “Street Smart,” with Trish Regan and Adam Johnson.
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’ 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 from May 15 through Wednesday, 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 $4.2 billion Bernstein Intermediate Duration Portfolio is the worst performer this year after the Pimco flagship and a related fund, falling 2.1 percent, followed by the Western Asset Core Bond Fund and the Vanguard Total Bond Market Index Fund, each with a drop of 1.8 percent.
Among the better performers, Gundlach’s $40 billion DoubleLine Total Return Bond Fund lost 0.4 percent Wednesday and gained 0.8 percent for the year, second-best after FPA New Income. Tad Rivelle’s $9.1 billion TCW Total Return Bond Fund also fell 0.4 percent Wednesday and is up 0.6 percent in 2013.
Gundlach said Thursday that Treasurys 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 Treasurys is that the DoubleLine fund has a shorter duration and less interest rate risk, Gundlach said.
“I think Treasurys will be the best-performing asset class for the next few months,” Gundlach said in a telephone interview. “The place that’s the best is the place everybody hated.”
Bernanke said Wednesday 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 Wednesday.
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. Treasurys. In a Twitter posting June 18, he recommended buying five-year Treasurys and earlier, on June 12, he called intermediate Treasurys with yields above 2 percent a “buy.” The “Fed’s not raising interest rates for years,” he said.
Gross’s call on Treasurys hasn’t worked out so far. The 10-year Treasury yield climbed four basis points to 2.39 percent at 3:49 p.m. Thursday in New York and reached 2.47 percent earlier in the day, the highest since August 2011, according to Bloomberg Bond Trader prices. Bonds decline in price as rates climb.
Gross cut the holdings of Treasurys 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. Treasurys have lost 1.8 percent this year, according to Bank of America Merrill Lynch indexes. The Barclays U.S. Aggregate Index, among the most widely used fixed-income benchmarks, has declined 1.7 percent this year and fell 0.6 percent Wednesday.
Rivelle’s TCW Total Return had 11 percent of its assets in Treasuries as of March 31, TCW data show. Gundlach’s DoubleLine fund had 4.8 percent of its money in Treasurys as of May 31.
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.
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 Treasurys 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 Thursday with Tom Keene.
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