UPDATE 2-Pimco Total Return lags 89 pct of peers in July-Morningstar

Thu Jul 31, 2014 1:39pm EDT

(Adds Pimco declines comment and Pimco Total Return Fund's year-to-date return)

By Jennifer Ablan

NEW YORK, July 31 (Reuters) - The Pimco Total Return Fund, the world's largest bond fund, run by Bill Gross, is ending the month on a rough note, lagging 89 percent of its peers so far in July.

According to preliminary Morningstar data on Thursday, Pimco Total Return is posting a negative 0.44 percent return, while its peer-fund category has a negative 0.23 percent return for the month as of July 30.

Gross' fund performance is widely followed as an industry benchmark, though this year has been one of Gross' roughest patches. Gross' successor, Mohamed El-Erian, resigned earlier this year, and the Pimco Total Return fund has had over $64 billion of net outflows since May 2013.

"The Pimco Total Return Fund (PTTRX) has a lot of duration exposure to the 1-5 year point of the yield curve, the exact spot where yields rose during July," said David Schawel, vice president and portfolio manager of Square 1 Financial.

"Meanwhile, they show to have just 11 percent of maturities over 10 years, areas which rallied the past month."

Gross has maintained his position on favoring shorter-maturing debt. He has repeatedly said fixed-income securities maturing in five to 30 years were "at risk" given reduced bond buying from the Federal Reserve.

Gross said the bonds the Fed "has been buying will have to be sold at higher yields to entice the private sector back in."

But the long end of the Treasury yield curve has been performing well.

In July, the Barclays Capital U.S. 20 Year Plus Treasury Bond Index posted returns of 2.25 percent. For the year, the Barclays 20 Year Plus is up 15.73 percent.

For the year, the Pimco Total Return fund is up 3.25 percent, lagging 76 percent of its peer category, Morningstar noted.

The Pimco Total Return Exchange-Traded Fund, an actively managed ETF designed to mimic the strategy of the flagship mutual fund, is posting a return of 0.04 percent in July so far and 4.32 percent so far this year. The Pimco ETF ranks at the top of its category, though its assets under management, at about $3.46 billion, are considerably smaller than the plain-vanilla fund.

The Pimco Total Return Fund had $225 billion in assets at the end of last month, down from a peak of $292.9 billion in April 2013. A Pimco spokesman declined to comment on the performance returns. (Reporting by Jennifer Ablan; Editing by James Dalgleish , Phil Berlowitz and Dan Grebler)

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