Bill Gross's Bond Fund Lured $18 Billion in 2012 After Outflow in 2011

By Min Zeng

The world's biggest bond fund run by Bill Gross took in $889 million in December, capping a year of rebound after a humiliating outflow in 2011.

For the whole year of 2012, the $285.4 billion Total Return Fund (PTTRX) at Pacific Investment Management Co. enticed $18 billion in net new cash, according to data from fund tracker Morningstar Inc. Thursday.

That was more than sufficient to cover the $4.97 billion net outflow in 2011. It was the first calendar-year redemption since the fund's launch in 1987 as Mr. Gross's ill-timed negative bets on Treasury bonds turned the fund into one of the worst performers among its peers in 2011.

Still, last year's inflow was smaller compared to $22.6 billion in 2010 and $50.1 billion in 2009.

Investors warmed up to the fund again in 2012, drawn by its strong performance. The fund handed investors a return of 10.4% for 2012, beating the 4.2% of the Barclays US Aggregate Bond Index, according to data from Morningstar. The fund beat 88% of its rivals last year.

"I issued a 'Mea culpa"' in 2011, said Mr. Gross in an interview in December. But for 2012, "we are celebrating with a 'Mamma mia!'"

Mr. Gross is founder and co-chief investment officer at Pimco, part of Allianz SE (ALV.XE, ALIZF). Pimco is one of the world's biggest asset-management companies, with about $2 trillion in assets under management.

Over the past 15 years, the bond fund, on average, has posted an annualized return of 7.2%, compared with the 5.9% return on the benchmark.

The key boost for the fund in 2012 came from Mr. Gross's bets at the start of the year that the Federal Reserve would buy high-quality mortgage-backed securities as part of its unconventional stimulus for the economy.

The Fed launched a program to buy MBS in September which pushed up the value of the securities and boosted returns for Mr. Gross's fund.

Mr. Gross has recently pared back his holdings in that sector. The share of MBS dropped to 44% at the end of November, the lowest of the year, from a peak around 53% earlier, according to the latest data available on Pimco's website.

Mr. Gross told Dow Jones in December that he is poised to continue to reduce that exposure.

By contrast, he is sticking with another of his favorite plays: Treasury inflation-protected securities. TIPS' principal and interest payments will rise in line with any increase in the consumer price index.

For some time, Mr. Gross has telegraphed his worries that the Fed's monetary stimulus program could generate higher inflation in coming years. For that reason, he has shunned 10- and 30-year Treasurys, whose value will be eroded by higher price pressures, and instead he holds shorter-dated Treasurys such as five-year notes as the Fed remains a buyer of Treasury debt in 2013.

"Investors should be alert to the long-term inflationary thrust of such check writing" by the Fed, said Mr. Gross in his January investment outlook released Thursday. "While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the 'out' years towards which long-term bond yields are measured."

Mr. Gross held 12% TIPS at the end of November, up from 9% last January, but had reduced his holdings of non-TIPS Treasury bonds to 11% from 29% over the same period.

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