Pimco Total Return Fund Outpaces Most of Its Rivals

By Min Zeng 

Nearly six months after Bill Gross's exit, Pacific Investment Management Co.'s flagship Total Return fund is beating most of its rivals.

The world's biggest bond mutual fund has returned 3.730% from the start of October through Tuesday, ahead of 92% of its peers and its benchmark, according to fund-research firm Morningstar Inc.

Mr. Gross, founder of the Newport Beach, Calif., firm and the fund's portfolio manager, left in late September following a year of heavy outflows and conflicts with other executives. In the nine months leading up to Mr. Gross's departure, the Total Return fund was trailing 80% of its peers.

"Though Bill Gross was made to leave the ship at the height of a storm, the new team guided it into calmer waters," said Jeff Tjornehoj, head of Lipper Americas Research. "Investors will take note if the fund manages to outperform in the coming months."

The Total Return fund boosted returns by paring back wagers on some regular U.S. government debt and being nimble in some riskier types of bonds.

But the improving performance hasn't kept investors from yanking money from the fund, whose assets have fallen by 57% from their April 2013 peak. February marked the 22nd consecutive month of net outflows, although the size of the withdrawals has moderated. The $124.7 billion Total Return fund is at risk of losing its title as the world's largest bond fund by assets to the Vanguard Total Bond Market Index fund, a passively managed bond fund with $114.9 billion of assets.

Performance is "what we are 100% focused on," said Scott Mather, one of the Pimco fund's managers, in a written statement Wednesday. "There are many opportunities to take advantage of market overshoots" in the coming years as the Federal Reserve moves closer to raising interest rates for the first time since 2006, he said.

The Pimco fund is now run by three managers--Mr. Mather, Mihir Worah and Mark Kiesel--a departure from Mr. Gross's sole-pilot mode.

The fund has returned 2.378% this year through Tuesday, beating 96% of its peers in the intermediate-term bond fund category, according to Morningstar. The benchmark Barclays U.S. Aggregate Bond Index returned 1.736% in the period.

After leaving Pimco, a unit of Allianz SE, Mr. Gross went to run the $1.45 billion Janus Global Unconstrained Bond Fund at Janus Capital Group Inc. The fund has handed investors a total return of 0.581% since Mr. Gross came on board Oct. 6, through Tuesday, according to Morningstar. That beats 62% of its peers.

A spokeswoman at Janus declined to comment on the fund's performance.

Institutional investors such as pension funds usually are slow in moving in and out of funds. That means outflows could continue to sting Pimco in the short term, analysts say.

One of Pimco's clients, Daniel B. Roe, chief investment officer at Budros, Ruhlin & Roe Inc. which has more than $2.2 billion assets under management, said it wasn't surprising that the fund's performance was improving given the caliber of the portfolio managers.

Mr. Roe said his firm significantly reduced exposure to the Total Return fund following Mr. Gross's departure but the move was due to an "already significant position" in the Pimco Income fund.

"We continue to hold client money in the total return strategy in 401(k)s," said Mr. Roe.

In its latest monthly commentary for February posted on Pimco's website, the Pimco fund's managers said exposure to Treasury inflation-protected securities was the largest contributor to outperformance during the month versus the benchmark index.

They also highlighted holdings in riskier, high-yielding debt, high-grade municipal bonds and dollar-denominated emerging-market debt.

The Pimco fund lumps its holdings of TIPS along with regular Treasury bonds and other debt in a category called U.S. government-related holdings. The holdings accounted for 35.29% of the fund's allocation at the end of February, compared with 37.71% at the end of January, and 43.19% at the end of December, according to data available late Tuesday afternoon on Pimco's website.

"I am not invested with Pimco right now," said Keith Amburgey, chief executive officer at Rutherford Asset Planning in Tampa, Fla. Rutherford has more than $1 million of assets under management. "I moved out what we had left when Gross left. But they have a good team, so it wouldn't surprise me if they turned things around."

Kirsten Grind contributed to this article

Write to Min Zeng at [e-mail]

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