Pimco in December published a “Strategy Spotlight” interview with Gross in which he said that there would be no changes in the “investment philosophy, process or approach” at the Unconstrained fund. Saying that the Federal Reserve’s plans to keep interest rates low were more important than the central bank’s decision to taper its bond purchases, Gross said that Pimco Unconstrained and other funds run by the firm would bet on the shorter-term debt, while pulling back from 5-, 10- and 30- year exposures.
“There may be Gross versus Dialynas differences at the margin, but they won’t be significant,” Gross said in the published interview. “There is only so much leeway the portfolio managers have here and the model dominates.”
Pimco Unconstrained’s effective duration had been declining during the second half of 2013, falling from 1.83 years as of June 30 to 1.74 years on Sept. 30 and 1.57 years on Nov. 30, according to Pimco data compiled by Morningstar’s Jacobson. During December, the fund’s duration jumped to 4.1 years, suggesting that the fund would benefit if interest rates declined and suffer should they rise.
Gross may have been increasing Pimco Unconstrained’s duration during December in anticipation of a decline in Treasury yields in January. The yield on 10-year Treasuries rose from 2.83 percent on Dec. 4 to 3.03 percent on Dec. 31, and declined to 2.64 percent by the end of January. Pimco Unconstrained returned 0.58 percent in January, the equivalent of a 7.1 percent annual return.
“You can see how it would be an opportunistic bet,” said Jacobson, who tracks the performance of funds managed by Newport Beach, California-based Pimco. “The fund has been humming along with relatively short number for quite a while,” Jacobson said in a telephone interview, referring to Pimco Unconstrained’s duration.
In a report posted on its website, Pimco said the fund added most of its duration during the fourth quarter through the use of money-market futures and options.
Under Dialynas, Pimco Unconstrained had purchased credit- default swaps on corporate bonds as well as indexes that track such debt, positioning the fund to profit should the spread, or difference in yield, between corporate debt and Treasuries widen. Gross had taken the opposite tack at Pimco Total Return, reducing the amount of protection it purchased on corporate bonds while issuing such insurance for other investors, essentially a bullish bet.
During the fourth quarter, Pimco Unconstrained divested almost all of the credit-default swaps it had purchased, including insurance on corporate bonds with a face value of $3.1 billion and another $4.4 billion of protection tied to high yield and investment-grade indexes. The fund increased the amount of credit default protection it issued on corporate and sovereign bonds.
The fund sold $5 billion of Treasury notes that matured in either 2014 or between 2018 and 2022, according to the data on Pimco’s website. The fund more than quadrupled holdings in Treasuries that mature from 2015 to 2017 to around $9.94 billion at Dec. 31.
The fund also sold much of its debt issued by government- sponsored enterprises such as Fannie Mae and Freddie Mac, as well as all of its Treasury bonds, which matured between 2021 and 2042 and had coupons ranging between 2.75 percent and 8.125 percent. These Treasury bonds had a face value of $833.7 million as of Sept. 30 and a market value of about $1.02 billion.
“That reduction was in anticipation of the Fed continuing to taper,” Gross said in the telephone interview. As a result of the tapering, the central bank is “buying fewer 30-year Treasuries and fewer agency” mortgage-backed bonds.