PIMCO's Gross says firm is scaling back on derivatives

NEW YORK Wed Jan 23, 2013 3:39pm EST

NEW YORK Jan 23 (Reuters) - Bill Gross, founder and co-chief investment officer of bond giant PIMCO, said on Wednesday that his firm is limiting its usage of derivatives and that global stocks are attractive in light of coming inflation.

"We're basically becoming more and more of a cash-based type of manager as opposed to what the concept is of derivatives," Gross said Wednesday at the ETF Virtual Summit in Irvine, California.

PIMCO, Pacific Investment Management Co., had $1.92 trillion in assets as of September 30, 2012. Derivatives have long been a staple of the trading strategy in Gross's PIMCO Total Return Fund, the world's largest bond fund with over $285 billion in assets.

The flagship fund, which invests mainly in investment-grade bonds, may also invest up to 10 percent of its assets in preferred stocks, convertible securities, and other equity-related assets, according to the fund's prospectus.

Gross said that the advantage of derivatives like credit default swaps, which are contracts that are used as insurance against default on debt issues or to speculate on credit quality, has diminished over time.

Gross also said that international stocks offer protection against coming inflation.

"I think an investor wants inflation protection and, to a certain extent, stocks do that," Gross said, and added that "global, multinational franchised stocks" are particularly attractive.

PIMCO began moving aggressively into equities when it launched its first actively managed stock mutual fund in 2010.

In his last letter to investors entitled, "Money for Nothin' Writing Checks for Free," Gross said that money-printing programs on the part of global central banks will eventually lead to inflation.

"The policies are ineffective and, we would suggest, increasingly ineffective. Which doesn't mean a recession, but it does mean slow growth for a long period of time," Gross said on Wednesday.

Gross added that inflation, spurred by programs like the Federal Reserve's purchases of agency mortgage and Treasury securities at $85 billion per month, will most adversely affect long-term bonds.

The PIMCO Total Return Fund earned a return of 10.36 percent in 2012, besting 88 percent of U.S. intermediate-term bond funds, according to Morningstar.

The PIMCO Total Return ETF, an actively-managed ETF which is designed to mimic the strategy of the flagship bond fund, outperformed the mutual fund last year with a return of 11.75 percent since its March launch, according to Lipper.

Actively-managed ETFs occupy a minor role in the nearly $2 trillion ETF and exchange-traded product space, since most of the funds are passive and track a benchmark index.

At the end of 2012, just $14.7 billion was invested in active ETFs and ETPs globally, according to Deborah Fuhr, partner at ETFGI, an independent research and consulting firm in London. That amount is just 0.8 percent of the $1.95 trillion invested in ETFs and ETPs as of last year, Fuhr added.

Gross's Total Return ETF was far more popular than any other active ETF, and attracted inflows of $3.5 billion over 2012, according to Lipper. Big outflows from other active ETFs, meanwhile, led to net inflows of just $111 million into the funds.

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