Bond King

Tough Times for the Bond King

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Bond King

While patience is a virtue, it appears to be one that is not possessed by many investors in actively managed funds. It is this difficult lesson that PIMCO’s Bill Gross aka “The Bond King” has had to learn lately. According to this article/video, the PIMCO Total Return Fund has suffered thirteen months of consecutive withdrawals. For May 2014, it had net outflows of $4.3 billion and cumulative total outflows of $59.6 billion since May 2013. For the twelve months ending 5/31/2014, PIMCO Total Return (PTTRX) lagged both the Barclays Aggregate Bond Index and the Morningstar Corporate Intermediate category by 1.0%1.

Unfortunately, this is not Mr. Gross’s first experience with difficult times, as we wrote about his mishap in 2011 when he incorrectly predicted an increase in long-term interest rates that caused his fund to lag its benchmark by 3.7%. In fairness, PTTRX beat its benchmark by 6.2% in 2012, and in 2013 it was essentially a tie.

To be clear, none of us deny that Mr. Gross is an extremely intelligent and talented professional. His monthly newsletters are filled with keen insights which we have quoted on different occasions. We only take issue with investors who believe that they are somehow entitled to an above-market return because they have chosen to place their dollars in PTTRX. The table below shows how investors as a whole have done (the investor return) over different time periods compared to how they would have done had they simply bought at the beginning of each period and held for the duration (the fund return).

The percentage of the return captured is remarkably consistent over the different time periods. This is no reflection on Mr. Gross, as he has no control over the cash flows of shareholders.

In our opinion, one thing that should concern investors in PTTRX is the enormous size of the fund. With $229 billion2 of assets, it has to be difficult to maneuver, as there are not very many market participants that can take the other side of its trades.  This could be detrimental to future performance in a situation where the yield curve suddenly changes and it becomes advantageous for the fund to reposition itself.

PTTRX was identified by BrightScope as the top fixed income fund used in 401(k) plans. Therefore, we will continue to keep a close watch on it, and we will keep you apprised of what we learn.

1Returns from, accessed on 6/18/2014 accessed on 6/18/2014.