Bill Gross, whose Pimco Total Return fund <PTTRX.O) is the world's largest bond mutual fund, has tripled his bet on mortgage debt, which now comprises about 61 percent of the fund's assets, the Financial Times said on Friday.
The chief investment officer of Pacific Investment Management Co said his decision to raise exposure in recent months stemmed from the U.S. government's implicit guarantee of debt issued by Fannie Mae FNM.N and Freddie Mac FRE.N, the government-sponsored mortgage financiers.
"Government policy is moving to sanctify the status of the government-sponsored agencies," Gross said, according to the newspaper. "It became a question of which institutions would be sheltered by the government umbrella."
Gross' change of heart follows a year when his fund with roughly $128 billion of assets under management outgained nearly all its peers.
He had slashed holdings of mortgage and corporate debt, and correctly predicted the U.S. housing slump and deep interest rate cuts by the Federal Reserve.
Gross said Pimco has been buying largely mortgage agency debt and "not the subprime garbage." He also called U.S. Treasuries "the most overvalued asset," according to the newspaper.
Mark Porterfield, a Pimco spokesman, did not immediately return a call seeking comment.
Pimco Total Return invested just over 20 percent in mortgage debt a year ago, according to the newspaper.
Such debt comprises 43 percent of the Lehman Aggregate Bond Index, the newspaper said. The index is a widely used benchmark for the U.S. fixed-income market.
The Total Return fund has returned 3.51 percent this year, outpacing 98 percent of its U.S. intermediate bond fund peers, according to fund information service Morningstar Inc. Over the last year, it has returned 11.8 percent, out gaining 99 percent of its peers.
Gross' comments on mortgages came about a day after he released his June investment outlook, in which he said U.S. inflation was not under control. He said Treasuries had negative real yields, while Treasury Inflation-Protected Securities, or TIPS, were too difficult to value.
Pimco, based in Newport Beach, California, is a unit of German insurer Allianz SE (ALVG.DE).
(Reporting by Jonathan Stempel in Bangalore; Editing by Richard Hubbard)