By Sam Forgione
NEW YORK Jan 9 Investors should focus on
shorter-maturity debt as key interest rates are set to remain
low for longer than expected given tepid U.S. inflation, said
Pimco's Bill Gross, manager of the world's largest bond fund.
Gross, who oversees the flagship Pimco Total Return Fund,
said investors should also put greater emphasis on inflation
rather than the unemployment rate when it comes to strategizing
In his monthly letter to investors, Gross said the personal
consumption expenditure (PCE) annualized inflation rate was "the
critical monthly statistic for analyzing Fed policy in 2014.
Why? (Ben) Bernanke, (Janet) Yellen and their merry band of Fed
governors and regional presidents have told us so".
In the note entitled "Seesaw Rider", Gross said he believes
there will be no rate hike until 2016, at the earliest, because
"at the moment, the Fed's fork or target for PCE inflation is
2.0 percent or higher while December's annualized rate was only
The U.S. Commerce Department releases the PCE price index
monthly together with its personal income and spending data. The
PCE price index is the Federal Reserve's preferred gauge of
price pressures facing consumers.
The Pimco Total Return Fund had a 37 percent exposure to
U.S. government-related securities, which include
inflation-protected securities, at the end of November,
according to the latest data available on the firm's website.
That constituted the largest holding for Gross's flagship
fund which has $237 billion in assets.
His monthly commentary is significant because Pacific
Investment Management Co. (Pimco), a unit of European financial
services company Allianz SE, is one of the world's
largest bond managers.
It had $1.97 trillion in assets as of Sept. 30, 2013,
according to the firm's website.
Gross, Pimco's co-founder and co-chief investment officer,
said total return bond portfolios like his "should float above
water in 2014". He added investors can expect 3-4 percent
returns in bond portfolios this year, but offered "no
His comments came after his fund fell 1.9 percent last year,
marking its worst performance since 1994 and its first annual
loss since 1999, according to data from Morningstar.
Its performance beat that of just 40 percent of its peers,
and led investors to pull a record $41.1 billion from the fund
throughout the year, according to Morningstar data [ID:
The outflows stripped Gross's fund of its status as the
world's largest mutual fund, a title which switched to the
Vanguard Total Stock Market Index Fund.
In the letter, Gross likened 2013 to a nearly decade-long
period after founding Pimco in 1971 when he was "dog-paddling
like crazy just to stay afloat", but was ultimately rewarded
when a 30-year bond bull market sent prices higher.
Gross said clients disappointed by a negative return may be
"shortsighted," and the current low-interest-rate environment
creates greater potential for interest rates to rise rather than
"When your annual return shows a minus sign, clients wonder
why they should pay you a fee to lose money. They have a point,
although it may be somewhat shortsighted," Gross said.
IN THE RED
His fund took a hit last year when interest rates shot
higher after Fed Chairman Ben Bernanke told Congress on May 22
the central bank could cut its $85 billion in monthly
bond-buying stimulus later in the year.
Investors feared that would cause a spike higher in interest
rates and price losses on bonds. The Fed surprised investors on
December 18 when it announced a $10 billion cut to its monthly
bond-buying, starting in January.
The yield on the benchmark 10-year U.S. Treasury 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.
Gross's fund was not the only one to suffer losses last
The Barclays U.S. Aggregate bond index, the benchmark by
which many U.S. funds gauge performance, fell over 2 percent in
2013 after the bond market selloff to mark its first annual loss
since 1999 and its worst performance since 1994.
In addition, U.S.-listed bond funds posted record outflows
of $86 billion last year, data from TrimTabs Investment Research
Unemployment hit a five-year low of 7 percent in November.
The Fed has said since December 2012 it would hold rates near
zero at least until unemployment falls to 6.5 percent, as long
as inflation stays in check.
The central bank has kept the key federal funds rate near
zero since late 2008 to help the economy recover from recession
and has promised to keep it there for a while longer, probably