By Sam Forgione
NEW YORK Jan 3 The Pimco Total Return Fund, the
world's largest bond fund, saw its assets sink by a record $41.1
billion last year after a mistaken bet on U.S. Treasuries
resulted in the fund's worst annual performance in nearly two
Investors pulled $4.2 billion from the fund in December,
marking the eighth straight month of outflows and reducing the
fund's assets to $237 billion. The fund fell 1.9 percent last
year, marking its first annual loss since 1999 and its worst
performance since 1994, according to preliminary Morningstar
Pimco had outflows of $10.4 billion across all of the its
U.S. open-end mutual funds in December, resulting in outflows of
$31.1 billion for the year. That marked the first annual
outflows from those funds since Morningstar began tracking them
The fund's status is closely watched because Pimco, a unit
of European financial services company Allianz SE, is
one of the world's largest bond managers and had $1.97 trillion
in assets as of Sept. 30, 2013, according to the firm's website.
Investors also pulled $147 million from the Pimco Total
Return Exchange-Traded Fund in December, and the ETF
saw net outflows totaling $197 million in 2013, Morningstar data
showed on Friday.
The ETF, which is actively-managed and designed to mimic the
strategy of the mutual fund, fell 0.85 percent in December,
marking the worst performance among its peers, according to
preliminary Morningstar data. For the year, the ETF fell 1.2
percent but still beat 80 percent of peers.
The Pimco Total Return Fund had a large holding in
Treasuries last year when Federal Reserve Chairman Ben Bernanke
told Congress on May 22 that the central bank could reduce its
$85 billion in monthly bond-buying stimulus later in the year,
which triggered a selloff in Treasuries and other bonds.
"They were on the wrong side of the direction of U.S.
interest rates," said Todd Rosenbluth, director of mutual fund
research at S&P Capital IQ.
The Total Return Fund had a 37 percent exposure to Treasury
securities at the end of May, according to data released on the
Pimco website, making Treasuries its largest holding. The fund
maintained the high exposure to the debt through November.
The yield on the benchmark 10-year U.S. Treasury meanwhile
spiked about 140 basis points from 1.62 percent on May 2 through
the end of the year. Bond yields move inversely to their prices.
The benchmark Barclays U.S. Aggregate bond index fell over 2
percent in 2013 in the wake of the bond market selloff, also
marking its first annual loss since 1999 and its worst
performance since 1994.
Investors pulled cash out of other U.S. intermediate-term
bond funds last year, although the Pimco Total Return Fund took
up much of the net outflows. All U.S. intermediate-term bond
funds had outflows of $73.2 billion last year through November,
according to Morningstar data.
Gross sought to reassure bond investors in a July letter to
investors after seeing $9.6 billion in outflows from the Pimco
Total Return Fund in June, a monthly record according to
"Don't jump ship now. We may have reached an inflection
point of low Treasury, mortgage and corporate yields in late
April, but this is overdone," Gross wrote.
Investors continued to pull cash from the fund, however, and
by October it lost its title of world's largest mutual fund to
the Vanguard Total Stock Market Index.
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.
Gross has also recommended Treasury Inflation-Protected
Securities (TIPS) in recent months on expectations that the
Fed's easy money policies will spur inflation.
Bets on TIPS also likely hurt the Pimco Total Return Fund's
performance in 2013 given the underperformance of those bonds,
Rosenbluth of S&P Capital IQ said. The Barclays U.S. TIPS index
fell 8.6 percent in 2013, marking its worst yearly performance
On Friday, Gross wrote on Twitter that short-dated bonds
could outperform stocks this year. U.S. stocks rallied to
multiple record highs in 2013 largely as a result of the Fed's
stimulus, and the Standard & Poor's 500 index rose 29.6
percent, its best performance since 1997.
"Don't be so sure a risk adjusted position in 1-5 year bonds
won't outperform stocks in 2014," Gross wrote.