On April 19, three weeks before he called the end of the 30-year bull market in bonds, Bill Gross said he was buying inflation-linked Treasuries, a bet that money printing by the world’s central banks would push up consumer prices.
While Treasuries subsequently fell as he had predicted, so did inflation expectations, amplifying rather than limiting losses for Gross’s Pimco Total Return Fund, which had 12% of its $289 billion in Treasury Inflation-Protected Securities at the end of the first quarter. The world’s largest mutual fund fell 4.7% in May and June, prompting $9.9 billion in withdrawals last month, the most on record.
The losses highlight the difficulties Gross faces as he steers Pacific Investment Management Co. through what’s arguably the biggest market challenge for the $2 trillion bond-fund manager since its inception in 1971. A premature bet against Treasuries caused his flagship to trail peers in 2011, prompting Gross to apologize to clients. With about 10% of the TIPS market owned by Pimco, according to Morningstar Inc., his success is tied in part to an asset class fellow bond manager Jeffrey Gundlach has avoided.
“Unless inflation goes higher, then all you have with TIPS is interest rate risk, just like every other Treasury,” said Gundlach, the portfolio manager for the $39 billion DoubleLine Total Return Bond Fund. “It’s an asset class that is exposed to investor surprise and disappointment.”
Gundlach, who called TIPS a “disaster” and a “trap” during a webcast last week, lost 2.6% in the two months through June and is down 0.3% so far this year in his main fund, beating 83% of peers. None of Gundlach’s funds reported holding any TIPS as of March 31.
Gross didn’t return an e-mail seeking comment. Mark Porterfield, a spokesman for the Newport Beach, California, firm, a unit of the Munich-based insurer Allianz SE, didn’t return calls and messages.
Gross has had between 9% to 12% of Pimco Total Return’s net assets invested in TIPS since at least the end of 2011, convinced that efforts by U.S. Federal Reserve Chairman Ben S. Bernanke and other central bankers to stimulate their economies will ultimately fuel inflation. The government bonds provide protection against inflation by increasing in par value with the U.S. Consumer Price Index.
At the end of the first quarter, Pimco Total Return had about 33% of its net assets invested in Treasuries, including $52.9 billion of traditional or “nominal” bonds and $34.3 billion of TIPS. The latter proved costly during the second quarter, when TIPS swooned under muted inflation expectations and sales by funds that lost money under a leveraged investment strategy employed by money managers such as Ray Dalio, known as risk-parity funds.
The TIPS held by the fund as of March 31 declined in value by $3.9 billion during the second quarter, according to data through June 28 compiled by Bloomberg. In contrast, the value of the fund’s holdings in nominal Treasuries fell by about $1.9 billion, assuming the holdings were unchanged.
Gross made another bad bet on Treasuries almost 2 1/2 years ago. In February 2011, he eliminated his allocation to Treasuries, only to miss out on a rally in government bonds that left Pimco Total Return trailing 70% of peers. Gross, in a letter to clients at the time titled “Mea Culpa,” called 2011 a “stinker.” His fund lost an estimated $5 billion to withdrawals that year, according to Morningstar.