By Sam Forgione and Jennifer Ablan
July 15 The Pimco Total Return Fund, the world's largest mutual fund, increased its holdings of Treasury securities and mortgages in June as performance fell to its lowest level since the financial crisis, data from the firm's website showed on Monday.
The fund, run by Pimco founder and co-chief investment officer Bill Gross, increased its holdings of Treasury securities to 38 percent in June from 37 percent in May during a broad selloff in the bond market.
Gross wrote on social media platform Twitter on Monday that the federal funds rate - the central bank's benchmark short-term borrowing rate - is likely to remain between zero and 0.25 percent until 2016. That low interest rate is "still the key to value," he said.
"So the #Fed #tapers with 1% or less #inflation & GNP growth? Policy rate still the key to value however. On hold 'til 2016," Gross wrote. Fifteen of the Fed's 19 policymakers in June had not expected to start raising rates until 2015 or later.
The Pimco fund also increased its holdings of mortgage securities to 36 percent in June, the most since last February, from 34 percent the prior month.
The fund was down 2.64 percent in June, marking its weakest monthly performance since September 2008, according to Morningstar. Investors pulled a record $9.6 billion from the fund last month, reducing its assets to roughly $268 billion, the Chicago-based Morningstar said.
The fund also showed a decrease in its holdings of non-U.S. developed market securities to 5 percent in June from 7 percent the prior month. Holdings of investment-grade and high-yield corporate bonds, as well as emerging market securities, were unchanged in June at 6 percent, 3 percent and 7 percent, respectively.
The Barclays U.S. Corporate High Yield Index fell 2.62 percent in June, notching its weakest performance since September 2011.
The fund's exposure to "other" securities, which may include municipal and convertible bonds, preferreds, and Yankee bonds, was at 5 percent in June.
Pimco said on its website that its U.S. Treasuries and government-related holdings may include nominal and inflation-protected Treasuries, Treasury futures and options, agencies, FDIC-guaranteed and government-guaranteed corporate securities, and interest rate swaps.
Pimco has been in the spotlight because of its large exposure in Treasuries and Treasury-related securities, which have been under severe selling pressure this year. Gross has even sought to reassure his investors, touting Pimco's 40-year performance history.
The fund is down 3.11 percent so far this year, ahead of only 24 percent of peers, according to Morningstar. Since its inception in May 1987 through last Friday, the fund has earned an annualized return of 8.04 percent, above the 6.94 percent annualized return of the Barclays U.S. Aggregate Bond Index over that period.
Fed Chairman Ben Bernanke triggered the credit market selloff when he told Congress on May 22 that the central bank could reduce its bond-buying later this year if the U.S. economy looked strong enough. The yield on the 10-year U.S. Treasury has risen 92 basis points since its close of 1.62 percent on May 2. As yields rise, prices fall.
The Fed is buying $85 billion in Treasuries and agency mortgage securities monthly in an effort to spur hiring and lower long-term borrowing costs. The Fed's stimulus has been a major source of support for both the bond and equity markets.
The Pimco Total Return Exchange-Traded Fund, meanwhile, is down 2.26 percent for the year, ahead of 54 percent of peers, according to Morningstar. The ETF was down 2.21 percent in June, marking its weakest monthly performance since its launch in February 2012. The actively-managed ETF is designed to mimic the strategy of the flagship fund.
Investors pulled $511.5 million from the ETF in June, its biggest monthly outflow since inception. In the most recent week in July, investors pulled $52.4 million, Morningstar said. The ETF is still the largest actively-managed U.S. ETF with roughly $4.3 billion in assets, the investment research firm said.
On July 7, Gross tweeted: "1 to 2 month performance numbers are a blip on a 40-year performance history. PIMCO marches on a long-term path."
In his July letter to investors, Gross said that the bond market selloff was "overdone" and that the yield on the benchmark 10-year Treasury belonged at 2.2 percent. The yield on the safe-haven bond closed at 2.54 percent on Monday.
"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.
Pacific Investment Management Co., a unit of European financial services company Allianz SE, had $2.04 trillion in assets as of the end of March, according to the firm's website.
The Newport Beach, California-based firm is run by Gross and chief executive and co-chief investment officer Mohamed El-Erian.