"..the Fed, uniquely in my opinion, will move up.. interest rates in late 2015. It won't however, move quickly.. Caution, therefore will prevail in the U.S. and elsewhere for a long time. Bonds, despite their ridiculous yields, will not easily be threatened with a new bear market." - Bill Gross, February 2015 Investment Outlook
This past September after leaving PIMCO, the largest fixed-income asset manager in the world that he co-founded and served as CIO, "Bond King" Bill Gross joined Janus Capital Group, Inc. (NYSE:JNS) to serve as the fund manager of the Janus Unconstrained Bond Fund (MUTF:JUCDX).
According to Richard Weil, the CEO of Janus, Bill Gross had invested $700 million into the fund at the end of 2014 (source: WSJ). With year-end fund assets totaling $1.38 billion, this represents a figure above 50.7% of the total fund AUM, according to the 12/31/14 JUCDX fund card (source: Janus).
This should come to no shock as investors who follow Gross are aware that he is both incredibly rich and heavily invested in his previous employer's funds. Also, he believes in bonds as an attractive investment as noted in his total reported holdings and most recent Investment Outlook newsletter.
In recent weeks however, insider trading reports with the U.S. Securities and Exchange Commission showcase that Bill Gross has begun selling off shares in all of his reported non-municipal PIMCO bond fund holdings. Insiders sell funds for many reasons, however a smart investor may assume that he may be setting a trend to exit PIMCO completely. As such, an analysis to what impacts Gross may have are immediately warranted.
Gross Reported PIMCO Holdings & Janus Holdings Portfolio
Gross followers may note that Bill Gross has been a long-time proponent of non-PIMCO funds such as the Reaves Utility Fund (NYSEMKT:UTG), as well as BlackRock CEFs as noted by his Barron's Roundtable remarks. Aside from his team of advisers however, most investors have no idea what his aggregate investment portfolio looks like.
To construct a portfolio using his insider trading reports with PIMCO however, as well as his reported JUCDX holdings of >$700 MM, investors may look at the Gross investment patterns in an effort to understand and if appropriate, invest alongside the King.
First however, it is important to note that Gross began selling off his non-municipal PIMCO closed-end fund holdings in January 2015, which is the first movement he's made since August 2014 while still at PIMCO.
News Flash: Bill Gross Begins To Sell-Off PIMCO Funds
After recently building up his PIMCO CEF (closed-end fund) portfolio, Gross has sold roughly $13 MM so far this year, with all trades occurring between January 12 and February 4. These transactions were all disclosed to the SEC via From 4 between February 2 and February 6 (source: SEC).
The sales occurred in three funds, which are all non-municipal focused, leveraged bond income funds. The total amount of sales are as follows:
1) PIMCO Corporate & Income Opportunity Fund (NYSE:PTY)
- Sold 379,761 shares
- Total proceeds of $5.725 MM
- Still holds 1,162,828 shares
- Current value of holdings is $19.454 MM
- Total sales were ~23.1% of EOY 2014 position
2) PIMCO Corporate & Income Strategy Fund (NYSE:PCN)
- Sold 99,776 shares
- Total proceeds of $1.535 MM
- Still holds 701,349 shares
- Current value of holdings is $10.674 MM
- Total sales were ~12.5% of EOY 2014 position
3) PIMCO Dynamic Income Fund (NYSE:PDI)
- Sold 182,733 shares
- Total proceeds of $5.527 MM
- Still holds 997,460 shares
- Current value of holdings is $29.704 MM
- Total sales were ~15.5% of EOY 2014 position
In the three funds mentioned above, the total Gross sales raised $12.788 MM. The value of current holdings as of February 10, 2014 is $59.833 MM. Using the current value of sold shares versus the value of these shares held EOY 2014, it can be summed that Gross has liquidated 17.6% of the current monetary value of his EOY 2014 PIMCO holdings in these three funds in 2015 (between 1/12/15 and 2/4/15).
I Love Bonds And Created PIMCO, So Why Sell My Funds?
Gross has not publicly stated why he's selling out of PIMCO, however one could imagine a host of reasons.
- To Fund Working Capital: After funding JUCDX with over $700 MM through EOY 2014, Gross may have a low working capital cash balance for his personal affairs. For all we know, $13 MM could be needed to buy a house or apartment, support a lifestyle of luxury or simply fund current expenses or taxes.
- Preference to Back Janus over PIMCO: Gross has a history of putting his money where his mouth is. He still loves bonds. JUCDX took in $86 MM in January 2015. Gross could be adding to the JUCDX AUM, which totaled ~$1.5 billion at the end of January 2015.
- Could Start New Janus Funds w/ Similar Strategies: Gross knows about diversification in the bond market. Perhaps Janus is going to offer similar products to PTY, PCN and PDI (the latter of which is PIMCO's newest, hottest fund). Why own PIMCO when you manage the same type of fund yourself at Janus?
- Gross To Start Giving Away Fortune: Why not give Buffett or Gates that call this year and start with some real donations, rather than the end-of-life Jeffersonian promise so many other h high-net worth individuals have "guaranteed."
- Emotions Outweigh Business Decision: Would you believe that Gross used his emotions to outweigh his investment decision to stay with PIMCO? After the Gross departure, PDI still retains the same management. Alfred Murata now co-manages ex-Gross funds PTY and PDI. Murata was co-Fixed Income Manager of the Year 2013 by Morningstar, an award he shared with PDI co-manager Daniel Ivascyn. Also, PDI returned 19.7% in 2014.
Note: With the PIMCO turmoil, Morningstar gave the 2014 Fixed Income Manager of the Year award to the managers of the Western Asset Core Bond Fund (MUTF:WACSX) and Western Asset Core Plus Bond Fund (MUTF:WAPSX), which had total returns of ~7.5%. While leveraged, PDI returned 19.7%, outpacing the Western funds by ~163%.
By contrast, Western's funds slightly outpaced Ivascyn and Murata-managed PIMCO Income Fund Institutional Shares (MUTF:PIMIX), which returned just over 7.1%. PIMCO Income class D shares (MUTF:PONDX) returned just over 6.8%.
Did The Gross Sales Affect PTY, PCN or PDI Premiums?
Gross has only liquidated 17.6% of his stake in the PTY, PCN and PDI funds. As such, he would be smart to be careful and not sell all his funds at once. Such sales could affect premiums in a negative fashion, thus costing Gross money while offering investors short-term volatility and below-trend entry points into the funds.
In analyzing the data, Gross did not add enough pressure to the daily share float to severely affect the premiums of the funds. As such, investors who expect Gross to continue such sales would be wise to infer that his actions will not affect premiums moving forward. In other words, Gross is adding only enough pressure to push the funds down minimally.
These premiums can be noted using the SEC Gross sale dates via the SECC Form 4 (link above) and premiums available at CEFConnect.com. Also, the date ranges were as follows PTY (1) [1/12=1/14], PTY (2) [1/29-2/4], PCN [1/29-2/3] and PDI [1/29-2/5]. Before premiums were date previous to first sale.
- PTY (1) premium before/after Gross sales: 16.49%, 14.42%
- PTY (2) premium before/after Gross sales: 19.79%, 18.62%
- PCN premium before/after Gross sales: 5.83%, 4.21%
- PCN premium before/after Gross sales: -0.49%, -0.79%
If Gross were to exit these holdings completely and in a short-term fashion, these funds would take quite the hit in terms of their premium.
The following is the ratio of Gross shares held currently to the average daily volume of each fund:
- PTY 4.5x
- PCN 7.5x
- PDI 5.1x
To completely exit the positions using the same money volume sales strategy, Gross would need 5.5 more scheduled trading binges. In this term, Gross traded each security for 3-5 consecutive days to achieve his sales goals while maintaining minimum premium impact.
The PIMCO & Janus Reported Holdings
Income investors haven't swarmed the Janus mutual fund that Gross now manages, as total AUM are $1.5 billion as of end of January 2015. While assets did flow out of PIMCO in mass, they didn't necessarily flow to Gross. Janus currently manages $183 billion, of which it saw a net outflow of $17.8 million in January.
Regarding PTY, PCN and PDI, Gross still holds $59.8 MM in these three PIMCO closed-end funds according to the SEC, while holding >$700 MM in JUCDX and millions more in other PIMCO CEFs.
Other selected Gross-held funds are analyzed below for premium, YTD return and yield. In addition to PTY, PCN and PDI, these include the following PIMCO CEFs:
- PIMCO Municipal Income Fund (NYSE:PMF)
- PIMCO California Municipal Income Fund (NYSE:PCQ)
- PIMCO Income Strategy Fund (NYSE:PFL)
- PCM Fund Inc. (NYSE:PCM)
- PIMCO Dynamic Credit Income Fund (NYSE:PCI)
- PIMCO High Income Fund (NYSE:PHK)
Investors who note the beginning of more daily sales from Gross regarding his current CEF positions at PIMCO may see a further slide in premiums and as a result, discounted entry-prices may offer investors upside in these proven, long-term income investment vehicles from the world's largest fixed-income asset manager.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.