Bill Gross, manager of the world's biggest mutual fund, is seeking to reassure clients that he hasn't lost his touch after he misjudged the extent of the economic slowdown, causing his Pimco Total Return Fund to trail rivals this year.
“This year is a stinker,” he wrote in an October letter to clients titled “Mea Culpa,” a copy of which was obtained last week by Bloomberg News.
“There is no "quit' in me or anyone else on the Pimco premises. The early morning and even midnight hours have gone up, not down, to match the increasing complexity of the global financial markets,” Mr. Gross wrote.
His $242.2 billion Total Return Fund Ticker:(PTTRX) returned 1.3% this year through Oct. 13, lagging behind 82% of peers, according to data compiled by Bloomberg. That is Mr. Gross' worst performance relative to rivals since at least 1995, the earliest year for which Bloomberg has rankings for Pacific Investment Management Co. LLC's flagship fund.
He shunned Treasuries in the first half of this year, missing a rally as investors rushed to the safety of government-backed debt amid the European sovereign-debt crisis.
“As Europe's crisis and the U.S. debt ceiling debacle turned developed economies towards a potential
recession, the Total Return Fund had too little risk off and too much risk on,” Mr. Gross wrote.
He cut his holdings in U.S. Treasuries to zero in February, saying at the time that the bonds didn't adequately compensate investors for the risk of inflation.
Mr. Gross also said that the government's attempts to stimulate the economy through bond purchases artificially “repressed” U.S. rates, leaving investors with negative real returns.
REVERSED COURSE
He has since reversed course, lifting his fund's holdings in Treasuries to 16% as of Sept. 30.
Mr. Gross has increased investments in housing- and mortgage-related bonds to 38% of assets, while cash equivalents and money market securities fell to -19%, according to Pimco's website.
“Pimco is not used to making "mea culpas,' so this is unusual for them,” said Kurt Brouwer, who oversees $1 billion as chairman of financial advisory firm Brouwer & Janachowski LLC, including investments in the Pimco Total Return Fund. “Shortening the duration of the fund and moving away from Treasuries definitely hurt results, but they're not shy about saying what they did wrong.”
Mr. Gross, who is co-chief investment officer at Pimco, wrote that the firm's economic-growth forecast for developed markets, under a scenario it had termed the new normal, was too optimistic.
Over the past five years, Pimco Total Return has returned an annual average of 7.8%, beating 97% of its rivals, Bloomberg data show.
Mr. Gross' letter was first posted last week on Dealbreaker.com.
