Pimco’s Gross Tells Clients 2011 a ‘Stinker’ as Total Return Trails Rivals

By Sree Vidya Bhaktavatsalam - Oct 15, 2011 11:01 AM GMT+0700

Bill Gross, manager of the world’s biggest mutual fund, sought 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,” Gross wrote in an October letter to clients titled “Mea Culpa,” a copy of which was obtained yesterday 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.”

Gross’s $242.2 billion Total Return Fund returned 1.3 percent this year through Oct. 13, lagging behind 82 percent of peers, according to data compiled by Bloomberg. That’s his worst performance relative to rivals since at least 1995, the earliest year for which Bloomberg has rankings for Newport Beach, California-based Pimco’s flagship. Gross shunned Treasuries in the first half of the 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,” Gross wrote.

Gross cut his holdings in U.S. Treasuries to zero in February, saying at the time the bonds didn’t adequately compensate investors for the risk of inflation. Gross also said the government’s attempts to stimulate the economy through bond purchases artificially “repressed” U.S. rates, leaving investors with negative real returns.

Rare ‘Mea Culpa’

He has since reversed course, lifting his fund’s holdings in Treasuries to 16 percent as of Sept. 30. He has increased investments in housing and mortgage-related bonds to 38 percent of assets, while cash equivalents and money-market securities fell to negative 19 percent, 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 Tiburon, California-based financial adviser Brouwer & Janachowski LLC, including investments in the Pimco Total Return Fund. (PTTRX) “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.”

Gross, who is co-chief investment officer at Pacific Investment Management Co., wrote that Pimco’s economic growth forecast for developed markets, under a scenario it termed the “new normal,” was too optimistic.

Over the past five years, Pimco Total Return has returned an annual average of 7.8 percent, beating 97 percent of its rivals, Bloomberg data show. Gross’s letter was first posted yesterday on Dealbreaker.com.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net