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Was Bill Gross Wrong About Treasuries?

Jul. 08, 2013 10:59 AM ET
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  • Has The Pimco Total Return Fund's recent performance been terrible? No, its been slightly worse than other intermediate term bond funds.
  • Was Bill Gross wrong about treasuries? No, not really.
  • Was Bill Gross wrong about duration? Not Sure.
  • Should you be leaving the PIMCO Total Return Fund? Not sure.

Long answers:

How has the Pimco Total Return Fund performed?

The fund is down 4.16% over the last month (as of 6/26/2013). However, even with this major recent loss, the fund is up 0.11% over the last year.

By comparison, the Vanguard Total bond Market ETF (BND) is down 2.17% over the last month and down 1.41% over the last year.

While the short-term performance of the PIMCO Total Return Fund has been terrible, anyone who has held the fund over a year is up money and ahead of people that bought BND over that time frame.

Was Bill Gross Wrong About Treasuries?

In April, Bill Gross had taken the Treasury holdings of the PIMCO Total Return Fund to 39% of the fund's value. Much of the news coverage has highlighted the heavy treasury bond holdings as a major cause of the fund's underperformance.

There are intermediate term bond funds which have much higher holdings of treasury bonds than the PIMCO Total Return Fund that did much better. The RidgeWorth Intermediate Bond Fund managed by Jim Keegan has 62% of its holdings in Treasuries and was down 2.06% over the last month. Treasury bonds performed much better than other types of bonds, such as corporate bonds and municipal bonds. Holding treasuries was not the reason the fund underperformed.

Was Bill Gross Wrong About Duration?

Duration is a measure of a bond's sensitivity to interest rates. Bonds that have longer dated durations perform worse when interest rates rise than similar bonds with shorter durations. The effective duration of the Pimco Total Return Fund is 5.15 years. The effective duration of the Vanguard Total Bond Market is 5.31 years. These two durations are very similar. You cannot say that Bill Gross went out on a limb by holding bonds with longer maturities.

Should you be leaving the PIMCO Total Return Fund? Not sure.

The Total Return Fund goes through periods where it greatly outperforms the market and periods where it underperforms the market. Over the last 10 years, its overall performance is outstanding. Investors that want performance always in line with the overall market should buy a bond index fund and stay away from actively managed funds such as PIMCO.

Bill Gross thinks the market has overreacted and pushed bond prices too low. Based on fundamentals, he believes the 10 year treasury should be trading about 2.2% instead of 2.5%. If he is right, now would be a good time to be in the PIMCO Total Return Fund.

You can learn more about Bill Gross's market views and the PIMCO Total Return Fund here


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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