Pimco’s Record Withdrawals at Total Return Extend to 13th Month

Jun 03, 2014 8:54 am ET

June 3 (Bloomberg) -- Investors pulled money from the biggest fund at Pacific Investment Management Co. for a 13th straight month, as the firm assures them that performance will soon be back at the top of the pack.

Bill Gross’s Pimco Total Return Fund, the world’s largest bond fund, suffered an estimated $4.3 billion in redemptions in May, Chicago-based research company Morningstar Inc. said yesterday in an e-mailed statement. Its assets fell to $229 billion as of the end of the month from a peak of $293 billion last year.

Gross, 70, is seeking to stanch redemptions, saying the fund that’s trailed 71 percent of peers over the past 12 months, according to data compiled by Bloomberg, will again rank at the top by the end of the year. Newport Beach, California-based Pimco is betting on a “new neutral” era characterized by global growth converging toward lower, more stable speeds and interest rates that remain below their pre-crisis equilibrium.

“The Pimco Total Return Fund delivered strong performance in May ahead of 79 percent of peer funds as the bond market sided with Pimco’s new neutral view that policy rates will stay lower for longer,” Mark Porterfield, a spokesman for the firm, said in an e-mailed statement yesterday. “We continue to see opportunity in bonds as a portfolio diversifier and as a way to generate the kind of long-term outperformance that our clients have come to expect from Total Return and all of Pimco’s strategies.”

Intermediate Bonds

The formerly top-ranked fund has seen its five-year ranking slip to the 56th percentile, according to data compiled by Bloomberg. Total Return climbed 3.3 percent this year through May, helped by a 1.2 percent gain last month.

As of April 30, the fund had its biggest concentration, 38 percent, in bonds with maturities of three to five years.

Gross is betting on five-year Treasuries, which are more sensitive to changes in the central bank rate than longer-dated bonds, on the idea that markets are overestimating how much the Federal Reserve will raise interest rates. Intermediate-term bonds reflect market expectations for Fed rates of as much as 4 percent, so the notes will outperform when investors realize that the central bank can’t raise borrowing costs much, he said last month. Longer-dated bonds offer less value after rallying the most this year, according to Gross.

Five-year Treasuries returned 1.8 percent this year through yesterday, compared with gains of 5.8 percent for 10-year notes and 13 percent for 30-year bonds, Bank of America Merrill Lynch Index data show.

Broken Models

Bond markets have become increasingly unpredictable and many traditional valuation models have been rendered useless after unprecedented stimulus by the Fed and other central banks.

As the Fed pares its bond buying program and economists forecast a more robust expansion in the U.S., Wall Street prognosticators said at the start of the year that yields had to rise as central banks started tightening monetary policies. Instead, investors poured into fixed income as global growth weakened, disinflation emerged in Europe, and tensions between Ukraine and Russia intensified.

Pimco Total Return’s record streak of redemptions comes as industrywide bond funds attracted money in the first three weeks of May, according to data from the Investment Company Institute.

Bond funds pulled in about $2.3 billion in the week ended May 21 after getting $4.1 billion in the previous period and $5.5 billion the week before that, the data show.

Secular Forum

Pimco’s new forecast, published in a report May 13, is the product of its annual Secular Forum, which guides the firm’s world view and investment philosophy over the next three to five years. In the aftermath of the 2008 financial crisis, that forum used the term “new normal” to describe an era of subdued returns, heightened government intervention and increasing clout for emerging nations in the global economy.

Gross’s fund lost a record $41.1 billion to withdrawals in 2013, and $15.6 billion so far this year, according to Morningstar, which estimates deposits or withdrawals for mutual funds by computing the change in assets on a monthly basis that isn’t accounted for by performance. Actual withdrawals or deposits may differ from Morningstar’s estimates because of the timing of purchases and redemptions or dividend distributions.

Gross’s fund ranks near the top in the past decade, Morningstar data show, on the strength of his calls on the economy and interest rates. He outperformed 99 percent of peers in 2007, according to data compiled by Bloomberg, by being early to see the weakness in the housing market, and trailed 66 percent of similar funds in 2013 when the debt he held lost value after the Fed hinted it would begin to scale back its bond buying program.

Gross is forecasting results this year that will again best his competition.

“Believe me, by the end of 2014, Pimco’s going to be at the top, not close to the middle,” Gross said in a May 14 interview with Erik Schatzker and Olivia Sterns on Bloomberg Television. “We have a thesis. We are sticking to our guns.”

--With assistance from Charles Stein in Boston.