Pimco, the World’s Biggest Bond Fund, Apologizes To Investors for “A Bad Year”

Bill Gross, manager of the world’s biggest mutual fund, has apologized to Pimco investors for his poor performance saying “I’m just having a really bad year.”

Gross’ apology comes after the poor performance of the Total Return Bond fund. For this year, Pimco has underperformed on its index, the BarCap Aggregate Bond by more than four percentage points.

Bill Gross, manager of the world’s biggest mutual fund, has apologized to Pimco investors for his poor performance saying “I’m just having a really bad year.”

Gross’ apology comes after the poor performance of the Total Return Bond fund. For this year, Pimco has underperformed on its index, the BarCap Aggregate Bond by more than four percentage points.

For a top-performing fund like Pimco Total Return, the numbers and apology are extremely rare. But this year has indeed been a tough year for Gross, who guessed wrong by betting heavily against U.S. Treasuries, which have turned out to be one of the biggest out-performers of 2011. The fixed-income guru, who helps manage more than $1.2 trillion at Pimco, wasn’t farsighted enough to foresee a flight to Treasuries prompted by events like the European debt crisis, the battle over the U.S. debt ceiling and the general anemic state of the global economy.

[quote]In a “special edition” of his monthly investment outlook, Newport Beach-based Gross concedes that he’s “having a bad year. . . . Pimco’s centerfielder has lost a few fly balls in the sun.”[/quote]

The $240-billion fund, the world’s largest bond portfolio, is up only about 1% year to date, ranking it in the bottom 20% of performance among its peers, according to Bloomberg News data. By contrast, the fund’s 7.8% average annualized return over the last five years ranks it in the top 4% of bond portfolios.

Gross, 67, made a major strategic error in the first half of the year by avoiding U.S. Treasury securities, asserting that they didn’t pay enough to make them worth holding.

Since then, government bonds prices in the US and elsewhere, including Britain, have reached record highs as a slowing US economy and Europe’s debt crisis lift demand for some of the safest, if lowest yielding, investments in the world. US Treasury bonds returned almost 7 percent to investors over the summer in their strongest quarter since the end of 2008.

According to Reuters, Gross is now positioning the fund for zero economic growth, levering up to buy longer-dated bonds with higher-yields and betting that a weak economy will keep interest rates low for a good long while.

“So where do we go from here?” wrote Gross. “Our internal growth forecast for developed economies is now 0 percent over the coming several quarters and the portfolio more accurately reflects this posture.”

“As Europe’s crisis and the US debt ceiling debacle turned developed economies towards a potential recession, the Total Return Fund had too little risk off and too much risk on,” Gross told investors.

The next month promises to be a critical one for bond investors with European leaders having promised a plan to fix the region’s debt crisis by the time G-20 leaders meet at the start of next month. If the plan is big and credible enough, analysts say that bond prices could fall sharply as the fear of a second major global financial crisis recedes.

Pimco was one of the first investors to articulate the view that the financial crisis had helped usher in a world in which developed western economies were unlikely to be able to grow as fast as before, something the asset manager dubbed “the new normal.”