UPDATE 1-Pimco Total Return has 1st down year since 1999 -Morningstar

Thu Jan 2, 2014 12:53pm EST

By Sam Forgione

NEW YORK Jan 2 (Reuters) - The Pimco Total Return Fund, the world's largest bond fund, had a negative return for 2013 of nearly 2 percent, its first annual loss in 14 years, as fears of a reduction in the Federal Reserve's bond-buying sent Treasury prices lower, preliminary data from Morningstar showed on Thursday.

The performance was the weakest for the fund since 1994, when it posted a negative return of 3.6 percent, Morningstar data showed. The fund declined about 1 percent in December, beating just 6 percent of peers, according to preliminary Morningstar data.

Pimco Total Return, with $244 billion in assets, is the flagship of the Newport Beach, California-based Pacific Investment Management Co. Bill Gross, the legendary manager of the fund, is the firm's co-founder and co-chief investment officer.

The performance of Gross's fund is closely watched because Pimco manages roughly $1.97 trillion in assets and is one of the world's largest bond managers. Gross's views, along with those of co-Chief Investment Officer and Chief Executive Mohamed El-Erian, are widely influential.

Pimco is a unit of European financial services company Allianz SE.

The fund suffered last year from a sizeable bet on U.S. Treasuries, whose prices declined after Fed Chairman Ben Bernanke signaled in late May that the central bank could begin scaling back its bond-buying stimulus if the U.S. economy looked strong enough.

"It highlights the risk of bond investing, that even managers with billions of assets under their guidance can have a bad year," said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

The Pimco Total Return Fund had a 37 percent exposure to Treasuries at the end of May, making it the fund's largest holding, according to data released on the Pimco website last year and compiled by Reuters. The fund's exposure to U.S. government debt remained high throughout the year despite the selloff in Treasuries, and was at 37 percent at the end of November.

Yields on the benchmark 10-year U.S. Treasury soared after Bernanke testified before Congress on May 22 that the central bank could begin scaling back its $85 billion in monthly purchases of Treasuries and agency mortgages later in 2013.

The 10-year Treasury yield, which fell to a low for the year of 1.62 percent on May 2, ended 2013 above 3 percent, an increase of about 140 basis points. Bond yields move inversely to their prices.

In recent letters to investors and posts on social media platform Twitter, Gross has recommended that investors buy shorter-dated Treasuries on expectations that the Fed will keep short-term interest rates low until 2016 or later.

The Pimco Total Return Exchange-Traded Fund, an actively managed ETF designed to mimic the strategy of the flagship mutual fund, fell 0.85 percent in December, making it the worst performer of its category for the month and resulting in a drop of 1.2 percent for the year.

That annual return still beat 80 percent of peers, however, according to the preliminary data from Morningstar. Investors pulled $115.8 million from the ETF in December, marking its eighth straight month of withdrawals, Morningstar data showed. The ETF has about $3.5 billion in assets.

Jeffrey Gundlach's DoubleLine Total Return Bond Fund , a competitor to the Pimco fund, fell 0.7 percent in December, beating 19 percent of peers. The fund had outflows of $2.08 billion in December, Reuters reported on Wednesday.

Gundlach's fund, which has about $31 billion in assets and is the flagship of Los Angeles-based DoubleLine Capital LP, rose 0.02 percent last year, beating 88 percent of peers, according to the preliminary Morningstar data.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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