* Money has become the economic and political wedge for profound changes in American society.
* Perhaps the most deceptive policy tool to lessen debt loads is the “negative” or exceedingly low real interest rate that central banks impose on savers and debt holders.
* Old-fashioned gilts and Treasury bonds may need to be “exorcised” from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint.
That’s Pimco founder Bill Gross talking, in his February Investment Outlook, a particularly - err, engrossing – read that DealJournal described as “a 2,000 word rant of epic proportions — taking a quasi-moralistic tone about financial markets and what he believes are missteps by the world’s central bankers to keep the cost of money low”.
It has now emerged that Gross is putting his money where his (highly opinionated) mouth is. As the FT reports on Tuesday, the world’s largest bond fund sharply cut its exposure to US government-related debt in January, before US bond yields rose in February to their highest level in almost a year. the report continues:
Pimco’s Total Return Fund, run by Bill Gross, a founder of Pimco, reported that its holdings of US government-related securities fell from 22 per cent in December to 12 per cent in January.
The proportion of US government-related holdings, which includes US Treasuries, is at the lowest level held by the $239bn fund since January 2009 when it held 15 per cent of its assets in the category.
In September last year, one-third of the fund was held in government-related securities. The category can include a variety of conventional and inflation-linked Treasuries, agency debt, derivatives and bank debt backed by the Federal Deposit Insurance Corp.
Pimco’s move to cut its exposure to US debt highlights Gross’s growing criticism of US deficit spending and the quantitative easing measures applied by the Fed and other central banks.
And, as Felix Salmon notes, what happened, narrowly, is that Gross has “changed his base view from worrying about deflation to worrying about inflation”. More broadly, says Salmon:
…he showed that he’s more than capable of repositioning his supertanker of a fund as easily and aggressively as if it were a hundredth of its size. He can do that because the Treasury market is the most liquid market in the world, and because he employs some spectacularly good traders.
So where is Pimco putting its money? As it cut back on US debt holdings, it has added to cash and debt from “non-US developed nations”, according to its website, and is also pursuing a recent shift into equities investments. In January Pimco also pared holdings of US mortgage-related debt, while leaving investment-grade debt, high-yield corporate debt, emerging market debt and US municipal bond holdings unchanged.
Gross, as the FT reminds us, is “known for swiftly changing his holdings in response to market moves”. The breakdown of the fund, meanwhile is published with a time lag.
The Pimco Total Return fund has lost 0.34 per cent in the year-to-date as of Friday, which as Reuters noted “is better than the 1.225 per cent loss” for the US Treasury/Agency Master index compiled by Bank of America Merrill Lynch. Last year, the fund was up 7 per cent for the year, which came in slightly less than its 10-year average return of 7.1 per cent.
Morningstar ranks the Total Return Fund as the best performing fund in its category over the last 15 years. However, as the FT notes, analysts caution that Pimco’s use of numerous derivatives as a substitute for direct positions in securities means that independent interpretation of TRF’s portfolio exposures is “extremely difficult”.
Indeed, says Salmon, “the holdings of the Total Return Fund are emphatically not what you should hold if you’re looking to work out your asset-allocation strategy over the medium or long term: instead, they’re held on an I-can-sell-these-at-any-time-I-want basis by arguably the greatest bond trader the world has ever seen”.
That’s why, he adds:
… investing in the Total Return Fund (minimum investment $1m) makes a lot of sense. Copying it, by contrast, or trying to position yourself in light of Gross’s public pronouncements, makes no sense at all.
We’re glad though that Gross (unlike certain Wall Street investment bankers) is under no illusions about the nature of his work. As he said in his February newsletter:
Having been part of this process and even a member of the rogue’s gallery itself, I know one thing for sure: This is not God’s work – it has the unmistakable odor of Mammon. PIMCO, while Mammonesque, is a company to be proud of. I can say with confidence that there are very few clients who have not benefited from our investment management over the years.
Related links:
Sign of the times: Pimco edition – FT Alphaville
Good luck, Mr Gross – FT Alphaville
Pimco chief – Fed’s move is not enough – DealBook