UPDATE 2-Pimco's Gross sees low, mid-single digit returns in 2014

Thu Apr 3, 2014 3:33pm EDT

(Adds quotes from Bill Gross and details on Pimco Total Return Fund)

By Jennifer Ablan and Sam Forgione

NEW YORK, April 3 (Reuters) - Bill Gross, manager of the world's largest bond fund at Pimco, said on Thursday that asset returns will be in the low- to mid-single digits this year despite relatively positive economic growth.

Expectations for returns for all unleveraged assets and diversified portfolios that attempt to reduce risk and maximize return will be in the low- to mid-single digits, Gross said in his monthly letter to investors.

Gross said Pimco recommends overweighting credit, particularly corporate credit maturing within one to five years as it "should hold current levels if inflation stays low."

The flagship Pimco Total Return Fund, which saw a net $3.1 billion of outflows in March and lagged 95 percent of its peers on the month, according to preliminary Morningstar data, has been significantly underexposed to corporate credit in recent months. It has $232 billion in assets.

In his letter, Gross mentioned Harry Markowitz, one of the pioneers of modern portfolio theory and a 1990 Nobel prize winner, who recently claimed that alternative investments such as hedge funds rarely offer the diversification benefits sought by their investors.

"Overall, because 2014 should be a relatively positive growth environment, carry trades in credit, curve and volatility should produce attractive Sharpe (ratio)/information ratios," Gross said. The higher a fund's Sharpe ratio, the better a fund's returns have been relative to the risk it has taken on.

"Return expectations however, for all unlevered assets and Markowitz generated portfolios will be in the low- to mid-single digits."

Eric Jacobson, senior analyst at Morningstar, has said the Pimco Total Return portfolio began struggling in February as the fund was "very underweight U.S. investment-grade corporate bonds. That would have been a detriment given that the overall investment-grade corporate index returned 104 basis points for February, and returns were better the farther down you went in quality."

Jacobson also said the Pimco Total Return Fund's performance in March struggled because of its significant overweight position in shorter debt and its underweight position in long-date bonds.

In his letter on Thursday, Gross maintained his position on favoring shorter-maturing debt. He said fixed-income securities maturing in five years to 30 years are "at risk" given reduced bond buying from the Federal Reserve. Gross said these bonds that the Fed "has been buying will have to be sold at higher yields to entice the private sector back in."

Pacific Investment Management Co, a unit of European financial services company Allianz SE, had $1.91 trillion in assets as of Dec. 31, according to the firm's website. (Reporting by Sam Forgione and Jennifer Ablan; Editing by Chizu Nomiyama, Jeffrey Benkoe and Eric Walsh)