Bill Gross is taking investors in his $232 billion PIMCO Total Return Fund for a rough ride.
The world's largest bond fund produced the worst risk-adjusted return over the past year among 16 U.S. intermediate- term funds with at least $5 billion in assets, according to the Bloomberg Riskless Return Ranking. As shorter-term debt tumbled in anticipation of rising interest rates, Gross's fund posted the second-worst returns and second-highest volatility in the group. The PIMCO Income Fund, run by Daniel Ivascyn, had the second-best performance with the third-lowest price swings.
Volatility has increased in the PIMCO Total Return Fund for each of the past three years, reducing risk-adjusted gains for investors in the fund. In the past year, the price swings have come with declining returns as Pacific Investment Management Co.'s co-founder Gross misjudged the timing and impact of the Federal Reserve's plan to reduce stimulus. Gross has been betting on 5-year Treasuries, a wager that went bad as the yield on such debt more than doubled since May.
"The fund has always had volatility," Todd Rosenbluth, director of mutual-fund research for S&P Capital IQ, said in a telephone interview. "It's just that investors used to get rewarded for it and now they're not."
Price Swings
PIMCO Total Return Fund declined 1.2 percent in the year ended March 31, trailing 88 percent of similarly managed funds, according to data compiled by Bloomberg. The fund's volatility was 4.3, compared with the 3.6 average for the group. Over the past five years, PIMCO Total Return's risk-adjusted return ranked 10th out of the 15 funds that have been in existence since then.
"We have a complete suite of products with different objectives and risk tolerances," Mark Porterfield, a spokesman for PIMCO, said in an e-mailed statement. "It's important to compare a fund's performance with its benchmark and not just with other mutual funds, which could hold riskier and higher- yielding assets. Total Return has outperformed its index for the past 6 months, 2, 5 and 10 years."
Higher price swings mean the price of an asset can move dramatically in a short period of time, increasing the potential of unexpected losses compared with a security whose prices are stable. Bloomberg's risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit risk. The returns aren't annualized.
Bernanke, Yellen
Former Chairman Ben S. Bernanke's suggestion last May that he might scale back the Fed's bond-buying program caused a sell- off in PIMCO Total Return's holdings of intermediate-term U.S. Treasuries and inflation-linked bonds. Last month, Fed Chairman Janet Yellen signaled that rates could climb sooner and faster than previously forecast, triggering losses in short-term bonds, the heart of Gross' portfolio.
PIMCO Total Return had 79 percent of its portfolio in bonds with maturities of 5 years or less as of Feb. 28, according to the Newport Beach, California-based firm's website. The fund had a short position in bonds with maturities of 20 years or more, which means it was counting on those securities to decline.
Bonds lose value as rates rise. The yield on 5-year Treasuries, an investment Gross had recommended in January 2013, rose to 1.73 percent as of March 31, from 0.82 percent May 21, the day before Bernanke spoke. Gross's fund had its biggest loss since 1994 in 2013 after being caught off-guard by the Fed's signals. "Gross isn't shy about taking risk," Jeff Tjornehoj, an analyst at Denver-based Lipper, said in a telephone interview. "When you're right you can be very right, but he's had moments lately where his anticipation of the market was off."
'Exceptional Job'
Over longer stretches, Gross has done better. PIMCO Total Return had a higher absolute return than at least 95 percent of rivals over the last 10 and 15 years, according to data from Chicago-based Morningstar Inc.
"Bill Gross has done an exceptional job over the long term, and in my view, he will continue to do well compared to the benchmark," said Joshua Emanuel, chief investment officer of Elements Financial Group LLC in Irvine, California, where he oversees $450 million. Gross's fund is typically measured against the Barclays U.S. Aggregate Index.
Gross, 69, who co-founded PIMCO in 1971, has faced other challenges this year. In January his heir apparent, Mohamed El- Erian, unexpectedly announced his resignation as chief executive officer. His departure was followed by reports of tension between the two. Gross lashed out at El-Erian in a June meeting as performance stumbled and withdrawals continued, two people familiar with the matter said this year.
Record Redemptions
PIMCO Total Return suffered record redemptions of $41.1 billion last year, based on data from Morningstar. Clients pulled an estimated net $3.1 billion from the fund and $7.3 billion from all of PIMCO's U.S. mutual funds in March, Morningstar's data show. That's even as investors put $11.6 billion into bond funds last month through March 19, according to estimates from Investment Company Institute, a Washington- based trade group.
