Tags: pimco | gross | bond

PIMCO'S Gross: Diversify as Bond Returns Weaken

Tuesday, 27 March 2012 10:30 AM

PIMCO co-founder Bill Gross, the manager of the world's biggest bond fund, is lowering expectations.

In his most recent investment letter, Gross says "total return as a supercharged bond strategy is fading."

Gross, who runs the $252 billion PIMCO Total Return Fund and helped bring bond investing to the masses, says investors should get used to smaller returns as the financial services industry continues to delever, or reduce its reliance on derivatives and borrowed money to generate higher returns.

In his April letter entitled "The Great Escape: Delivering in a Delevering World, Gross writes that investors should not "desert bonds" if annual returns hover around 4 percent instead of 10 percent. He says that bonds should remain a "critical components" of an investor's portfolio.

"Levered hedge strategies based on spread and yield compression are fading," says Gross. "As we delever, it will be hard to deliver what you have been used to."

The Total Return Fund is up just under 3 percent this year.

In light of this new reality for bond investing, Gross says he favors high-quality, short duration and inflation-protected bonds. He also likes dividend-paying stocks with a preference for developing over developed markets.

He also favors commodities whose prices rise with inflation and are in limited supply.

Gross made these recommendations in his latest investment outlook, published on Tuesday.

In an ultra-low interest rate climate where global growth and inflation would stay mild, investors "must take risk in some form," Gross wrote.

Clinging to near-free assets such as Treasury bills would mean earning an inflation-adjusted return of minus 2 percent to 3 percent, Gross said.

PIMCO, short for Pacific Investment Management Co. is a subsidiary of Allianz.

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Tuesday, 27 March 2012 10:30 AM
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