Pimco’s Bill Gross cuts flagship fund’s government debt holdings

Pacific Investment Management Co.’s Bill Gross reduced holdings of Treasuries and other U.S.- government-related debt in his flagship fund in August to 35%, the lowest level since March.

The proportion of U.S. government and related debt in the $251 billion Total Return Fund dropped from 39% in July, according to data on Pimco’s website. The Newport Beach, California-based company doesn’t comment directly on monthly changes in holdings or specific types of securities within a market sector.

The Total Return Fund dropped more than $41 billion, or 14% of its assets, in the past four months through losses and investor withdrawals. The fund suffered $7.7 billion in net redemptions in August, the Chicago-based researcher Morningstar Inc. said Sept. 4 in an e-mailed statement, the fourth straight month of withdrawals and the second highest amount this year.

Bond managers are being challenged in ways they never have been, Gross, co-founder of Pimco, said in a radio interview on “Bloomberg Surveillance” with Tom Keene on Sept. 6. The Federal Reserve will go ahead with a plan to reduce unprecedented bond purchases despite a disappointing jobs report for August, Gross said.

While Pimco is seeing withdrawals from the Total Return fund, investors are adding money to other strategies, such as the Pimco Unconstrained Bond Fund, he said.

Mortgage Securities

Gross slightly increased last month the Total Return Fund’s holding of mortgage securities, its second-largest sector, to 36%, from 35% in July, the company’s website showed.

Pimco cut non-U.S. developed nations’ debt to 2% last month, from 3% in July. U.S. credit, which includes investment-grade and high-yield securities, held at 9% in August. The category was previously separated into two sectors called investment grade and high yield.

The Total Return Fund’s emerging-market debt holdings also stayed steady at 6% last month, while money market and net cash equivalents more than doubled to 7% last month, compared with 3% at the end of July.

Over the past five years, the Total Return Fund has returned 6.43%, outperforming 86% of competitors. It has lost investors 4.09% in 2013, outperforming just 20% of its peers, according to data compiled by Bloomberg.

The Total Return Fund’s government and Treasury debt category includes fund holdings of U.S. Treasury notes, bonds, agency debt, interest-rate swaps and inflation-protected securities.

‘Taper Lite’

“Bernanke and company are committed to a taper,” Gross, said in the Bloomberg radio interview last week after a report showed payrolls in the U.S. increased in August by 169,000, versus a forecast of 180,000. “It will be taper lite as opposed to a strong tapering.”

The yield on the Treasury 10-year note touched 3.005%, the highest level since July 2011, just before the report amid expectations the Fed will cut back on its government-bond buying. Yields reached a 2013 low of 1.61% on May 1 before Chairman Ben S. Bernanke said that month the central bank was considering winding down the program.

Policy makers will reduce Treasury purchases to $35 billion from $45 billion at their Sept. 17-18 meeting while maintaining mortgage-bond buying at $40 billion, according to the median of 34 responses in a Bloomberg News survey of economists on Sept. 6. That pace was unchanged from an Aug. 9-13 poll, as was a projection that the program will end in June.

Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.97 trillion in assets as of June 30.

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