Bill Gross overhauled the Pimco Unconstrained Bond Fund after replacing Chris Dialynas as manager, taking control of Pacific Investment Management Co.’s best-selling alternative to traditional fixed income.
The $25.6 billion fund jettisoned 30-year Treasuries and most of its agency mortgage bonds, increased a wager on corporate debt through credit-default swaps, and ended bets that the U.S. dollar would appreciate against the Chinese yuan, according to data on Pimco’s website. The effective duration, a measure of sensitivity to interest rate changes, more than doubled in December, when Gross assumed control of the unconstrained fund.
“We became more credit friendly in anticipation of an improving economy and a positive stock market,” Gross said in a telephone interview. Gross said he extended the fund’s duration in light of “an undervalued Treasury market which was too high yielding,” adding that “Mr. Dialynas might have done the same thing.”
Dialynas joined Pimco in 1980 and had managed the Unconstrained fund since its inception in June 2008. Pimco announced his plan to take a sabbatical in the beginning of December, a month before the abrupt resignation of Chief Executive Officer Mohamed El-Erian spurred leadership changes at the $1.9 trillion investment firm.
The management switch raises questions over whether there would be wholesale changes at Pimco Unconstrained, said Eric Jacobson, a research analyst at Chicago-based Morningstar Inc. Gross is a “glass-half-full” kind of investor while Dialynas is more of a “sky-is-falling” type manager.
Gross is taking charge of Pimco Unconstrained as investors flock to flexible go-anywhere strategies while fleeing core fixed income in anticipation of rising interest rates. Pimco Unconstrained attracted $8.7 billion in 2013, according to Morningstar, with some of that money coming from Gross’s flagship Pimco Total Return, which had a record $41 billion of net redemptions last year.
Unconstrained funds can invest across a broad array of fixed-income securities, regardless of maturity, credit quality and geographic origin of the issuer. They can also shield themselves from the impact of rising interest rates by adjusting duration.
One potential advantage is that the funds seek absolute returns rather than to outperform the Barclays U.S. Aggregate Index, the benchmark for core bond funds such as Pimco Total Return.
In a March presentation for the State Universities Retirement System of Illinois, Pimco said the market for U.S. government debt had increased by $6 trillion since the financial crisis, forcing the Barclays Aggregate to load up on interest- rate-sensitive Treasuries.
According to Pimco, U.S. Treasuries comprised some 36 percent of the Barclays Aggregate in 2012, up from 25 percent in 2008. Pimco included a headline in the March 2013 presentation that asked “Do you want the U.S. government deciding your asset allocation?”
Pimco also said in the presentation that future gains from core bonds such as Pimco Total Return are “likely to be challenged” and suggested Illinois move some money to an unconstrained strategy. The university withdrew about $432 million from Pimco Total Return and moved it to Pimco Unconstrained, according to a June 30 report.
The fund has attracted cash despite lackluster returns. Pimco Unconstrained fell 2.6 percent to trail 84 percent of peers in 2013, and has lagged behind 67 percent of rivals over the past five years, according to Morningstar. This year through March 3, the fund returned 1.2 percent, putting it ahead of 71 percent of other nontraditional funds, Morningstar data show.
Sabrina Callin, the product manager for Pimco’s unconstrained bond strategy, said Morningstar includes a variety of funds within its unconstrained category, some of which are highly correlated with high-yield bonds. That makes comparisons difficult, she added.
“It’s a very heterogeneous universe” in which the various funds aren’t necessarily seeking similar returns or risk objectives, Callin said. “One of the objectives we are seeking is to limit downside risk to preserve capital.”