By Charles Stein Dec. 9 (Bloomberg) — Pimco Total Return Fund , run by Bill Gross since its inception in 1987, is set to become the biggest mutual fund in the industry’s history as individual investors mostly sit out the 2009 stock rally for the safety of bonds. Based on the pace of current inflows, Gross’s bond fund this month may surpass the record $202.3 billion reached by Growth Fund of America in 2007, according to researcher Morningstar Inc. Total Return managed $199 billion at Nov. 30, while Growth Fund, which buys stocks, had $153 billion. Total Return took in $42 billion of new cash this year through October, four times more than any other U.S. mutual fund, Morningstar data show. The growth underscores the reluctance of individuals to invest in equities even after U.S. stocks surged 61 percent from a 12 1/2-year low in March, and the appeal of Gross’s returns, which beat all but four similar funds in the past decade. “Last year was a time when many funds got burned, but the biggest fund of all did fine,” Russel Kinnel , director of mutual-fund research at Chicago-based Morningstar, said in a phone interview. Gross, co-chief investment officer of Pacific Investment Management Co. in Newport Beach, California, returned 4.8 percent last year while the Standard & Poor’s 500 Index , a benchmark for the largest U.S. equities, lost 37 percent including dividends. Investors added a net $297 billion to bond funds in the first 10 months of 2009, compared with $12 billion for stock funds, according to Morningstar. Return Since Inception Total Return climbed an average of 8.5 percent annually including dividends from its opening in May 1987 through Dec. 4. That compares with the gain of 7.4 percent by the Barcap U.S. Aggregate Total Return Index . The Pimco fund has returned 14 percent this year. The size of Gross’s fund, already the largest based on current assets, could pose problems because many investments may be too small to have a meaningful impact on performance, said T.J. Marta , chief market strategist at Marta On The Markets LLC, a financial-research firm in Scotch Plains, New Jersey. “You can’t cherry-pick the best investments because you don’t get enough return for your buck,” Marta said. Bond markets are sufficiently large and liquid to accommodate a $200 billion fund without hurting returns or restricting selection, Jeff Tjornehoj , senior research analyst at Lipper in Denver, said in a telephone interview. The U.S. bond market had $34.3 trillion of debt outstanding in the second quarter, according to data from the Securities Industry and Financial Markets Association , a New York-based trade group. Advantage of Heft Gross said size would be a legitimate issue if the fund underperformed the market for several years. “For over 20 years now, it has not been,” he wrote in an e-mail. The fund’s heft creates advantages, including better access to the issuers of debt and the ability to receive more “attractive new-issue allocations,” Gross said. The can hold derivatives, which are securities whose value is derived from an underlying asset such as debt, stocks or commodities. Derivatives can expand the universe of investments for a fund. Gross increased his holdings of government-related debt in October to 63 percent of the fund’s assets, the highest in five years, according to the most recent data available on Pimco’s Web site. The “systemic risk” of new asset bubbles is rising as the Federal Reserve keeps interest rates at record lows, Gross wrote in a commentary published last month. Under what Pimco has termed the “new normal,” investors should be prepared for lower-than-average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy. Mortgage Holdings Fall Total Return’s holdings of mortgage debt fell to 16 percent of the portfolio by market weight from 22 percent in September, matching their smallest percentage of the assets since May 2004. Investment-grade corporate securities rose to 18 percent of the fund from 17 percent, while high-yield bonds fell to 1 percent from 2 percent, according to the firm’s Web site. Total Return rose 7.7 percent annually in the 10 years ended Nov. 30, according to Morningstar. The four comparable funds with better gains are: the $9.3 billion Natixis Loomis Sayles Investment Grade Bond Fund , which returned 9 percent; the $5.8 billion Delaware Diversified Income Fund, up 8.8 percent; the $403 million Frontegra Columbus Core Plus Fund, which increased 8 percent; and the $11.9 billion TCW Total Return Bond Fund, which returned 7.9 percent. ‘Rare Trait’ Pimco Total Return started the decade with $28 billion in assets. As the fund grew, Gross shifted from picking individual bonds to placing bets on specific categories such as mortgage, corporate and government bonds, said Eric Jacobson , director of fixed-income research at Morningstar, which gives the fund its highest rating of five stars. “It’s a rare trait to manage at that level,” he said. Gross’s comments on the economy, interest rates and the bond market, made on Pimco’s Web site as well as on television and radio, are closely followed by investors. In an October 2005 investment commentary, Gross predicted a “slam-dunk” scenario in which housing prices would cool, leading to a decline in “funny-money” lending practices and home equity, a weakening of the U.S. economy and a reduction in interest rates by the Federal Reserve. “If real housing prices decline in the U.S. in 2006 and 2007, a recession is nearly inevitable,” Gross wrote. A recession began in December 2007, according to the National Bureau of Economic Research. Little Junk He’s also known for avoiding high-yield, or junk, bonds. The average credit rating of bonds in the fund is AA, the third highest on Standard & Poor’s scale, with 4 percent of assets in junk, according to the fund’s Web site. Gross, 65, is a stamp collector and has said he turned $200 into $10,000 while playing blackjack for four months in Las Vegas after college. He was born in the Ohio steel-company town of Middletown. A graduate of Duke University in Durham, North Carolina, with a psychology degree in 1966, he spent three years in the Navy and served in Vietnam. Gross joined Pimco after earning a Master of Business Administration degree from the University of California in Los Angeles in 1971. He began using yoga more than a decade ago and credits his meditation sessions with clearing his head and helping him absorb unexpected news, such as a Fed half-point interest rate cut in January 2001. The news caught him in the middle of a “sun salutation,” which softened the blow, he said at the time. Total Return attracted $115 billion since the start of the decade, the most of any mutual fund. Growth Fund of America, run by Los Angeles-based Capital Group Cos., was second with $99 billion. Pimco, a unit of Munich-based insurer Allianz SE , managed $940 billion in assets as of Sept. 30. “They’ve got a well-known visible manager, a great brand and they’ve been successful,” Tjornehoj said. To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net .
Read more from the original source:
Gross Headed for Record Book as Manager of Biggest Mutual Fund in History
