At Morningstar, Bill Gross defends Pimco performance

“Bond King” says the firm's flagship fund is starting to do better

Jun 19, 2014 @ 4:58 pm

By Trevor Hunnicutt

Bill Gross, who manages the world's largest bond fund, defended the performance of Pacific Investment Management Co., as its flagship product continues to suffer withering withdrawals.

"The Total Return Fund, long lambasted as underperforming, is outperforming its index by a decent margin, before fees,” said Mr. Gross, who sported dark sunglasses as he gave the keynote address at the Morningstar Investment Conference. “We're $50 billion poorer over the last 13 months; it makes you wonder why that would be. Perhaps we haven't been using enough red queens.”

In invoking red queens, Mr. Gross was making a reference to a 1962 movie, "The Manchurian Candidate," in which the playing cards are used as a trigger to activate a brainwashed assassin working on behalf of Communists. Mr. Gross had suggested that he use the technique on reporters to curry favor.

Since last year, the media has tracked his Total Return Fund's decline closely, both in performance and outflows, as well as the exit of Mohamed A. El-Erian, the firm's former chief executive.

(Don't miss the story of Bill Gross' tarnished crown)

Mr. Gross said the firm's new leadership structure, installed after Mr. El-Erian announced his departure in January, is working well. The firm installed a set of deputy” chief investment officers to take over some managerial duties.

“I have never been happier at work,” Mr. Gross said.

The “Bond King,” as Mr. Gross is sometimes called, says Total Return (PTTAX) is witnessing a turnaround. In his address, he said the fund's skillful use of Treasuries and related securities, which make up about half the portfolio, allows those relatively low-yielding assets to take on attributes of higher-yielding corporate bonds.

And he said the firm's use of intermediate-duration bonds — like five-year bonds — makes sense as the developed world, which is highly leveraged and expected to see continued slow growth, adjusts to what Pimco calls the "new neutral."

Pimco, co-founded by Mr. Gross in 1971, has seen billions of dollars of outflows each month for the last year. Last year, the Total Return Fund underperformed most of its competitors and its institutional share class had a total return of -1.92%, its worst performance since 1994. The fund has suffered nearly $60 billion in outflows in the 13- month period ended May 31, according to Morningstar Inc.

But in May, the fund's institutional share class returned 1.25%, beating its benchmark and ranking in the 23rd percentile among funds in its category, according to Morningstar.

On Thursday, Mr. Gross forecast 3% to 4% returns in bonds and 4% to 5% in stocks going forward. And he cautioned that the Federal Reserve's withdrawal of its bond-buying stimulus program is likely to raise waves in financial markets.

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