Diary of a Financier

PIMCO Total Return Rumored to Take Equity Stakes

In Capital Markets on Thu 16 Dec 2010 at 13:45
  • PIMCO rumored to allocate 10% of its Total Return Fund into equity classifications.
  • This could be Bill Gross’ death sentence for fixed income.
In soundbite after soundbite, Bill Gross has pounded the table to apprehend these latter rounds of Quantitative Easing, the death knell of the 30-year bond bull.  From PIMCO’s November Investment Outlook:

The Fed’s announcement of a renewed commitment to Quantitative Easing has been well telegraphed and the market’s reaction is likely to be subdued… [it] will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.

…We [PIMCO] are a survivor and our clients are not going to be Turkeys on a platter.

Today, we have unconfirmed news of Mr. Gross’ strategy to survive, from Street Insider & Bloomberg:

Bill Gross’ massive $250 billion PIMCO Total Return Fund may invest up to 10 percent of assets in equity-linked securities like preferred stocks, according to a regulatory filing. The fund won’t invest in common stock.

Bloomberg first reported this news.

PIMCO may start investing in these equity securities as early as the second quarter of next year.

10 percent of the massive fund would equal about $25 billion.

As the flagship fund for a blockbuster Fixed Income shop, the Total Return Fund is naturally categorized accordingly, from Bloomberg:

PIMCO Total Return Fund

  • Objective: Government/Corporate
  • Asset Class: Debt
  • Fund Profile: The Fund’s objective is to maximize total return, consistent with preservation of capital and prudent investment management. The fund invests at least 65% of its assets in a portfolio of investment-grade fixed income instruments of varying maturities.

True to form, it’s debt oriented, but do note both the objective to maximize total return and the flexibility to allocate 35% of assets into unspecified asset classes.

If confirmed, this news of Mr. Gross’ 10% foray into equities adds to the string of erratic gestures by the “King of Bonds.”  On top of his candid comments in monthly newsletters, Gross has started buying MBS en masse; consider this note from my November 19 article over at Seeking Alpha:

…either Gross knows that the Fed will have no option but to promptly shift from monetizing MBS in addition of USTs (now that rates have once again started leaking wider)… or the firm is convinced it will be successful in getting the BofA’s to accept all of its putback demands, and possibly more.

PIMCO Overall Allocation

The gamble on mortgage putbacks looks like it may rear some return, as a settlement appears the most likely outcome (per Yves Smith).  But nevertheless, this looks like a strategic–not a tactical–move by Mr. Gross.  Further, it’s not so much a vote for an equity bull as a denouncement of fixed income.

While this shift may take time to pan-out, PIMCO’s Total Return Fund has fallen 9.2% from its peak on November 4… the date of the Fed’s QE2 announcement.  That’s a volatile gouge in a bond fund, although not unsurprising after the volatile upswing preceding.  Nevertheless, what would have the downside been had Mr. Gross not already been reallocating?

I manage some smaller accounts outside of our PM strategies–accounts too small to trade alongside out High Net Worth clients.  There was an allocation therein toward the Total Return Fund (PTTPX) until we split the position into half Real Return Fund (PRLPX) and the Commodity RealReturn Strategy Fund (PCRPX).  I expect to maintain these positions through 2q2011, but the divergence is stark so far:

Total v. Real Return Funds




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