PIMCO's Gross admits he struck out on bonds this year


In a Special Edition letter posted on PIMCO’s website, Gross, who runs the $242 billion PIMCO Total Return portfolio, wrote that he underestimated the contagion effect from the Europe debt crisis and the U.S. debt ceiling debacle.”As Europe’s crisis and the U.S. debt ceiling debacle turned developed economies toward a potential recession, the Total Return Fund had too little risk off and too much risk on,” said Gross, who also shares the title of co-chief investment officer at Pacific Investment Management Co. with Mohamed El-Erian.Gross, known as the “bond king”, came under heavy criticism earlier this year when he bet heavily against U.S. Treasuries which have turned out to be one of the biggest outperformers of 2011.His fund’s poor performance led Gross to simply call his open letter to investors, “Mea Culpa.”It is up only 1.06 percent year to date versus the benchmark BarCap U.S. Aggregate Index which is up 3.99 percent.Gross, who helps manage more than $1.2 trillion at PIMCO, said late Friday the Total Return fund had positions in German bonds and Canadian Treasuries to counter the U.S. underweight position, “but not enough.”He added that minor percentages of emerging market corporate and sovereign debt, effectively denominated in their local non-dollar currencies, did not perform well either.”The simple fact is that the portfolio at midyear was positioned for what we call a “New Normal” developed world economy - 2.0 percent real growth and 2 percent inflation,” Gross said.That’s all changed, of course. Gross said PIMCO’s internal growth forecast for developed economies “is now zero percent over the coming several quarters and the portfolio more accurately reflects this posture.”Last week, Reuters reported that Gross ramped up buying of mortgage-backed securities in September, albeit by using leverage, on the likelihood the Federal Reserve’s reinvestment program in those securities will boost prices significantly.Gross increased mortgage debt to 38 percent of assets in September, from 32 percent in August, as the U.S. central bank announced last month that it “will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”His move into mortgage-backed securities also comes as the PIMCO Total Return fund’s cash equivalents and money-market securities fell to negative 19 percent September, from negative 9.0 percent in August.In having a so-called negative position in cash equivalents and money-market securities, it is an indication of using derivatives and short-term securities as collateral in order to boost the fund’s buying power with leverage.Gross’ move to seek more yield by putting more money into mortgage bonds is yet another bold bet which many will be watching after Gross’s call on Treasuries cost his fund’s performance. In doing so, he is effectively extending the average duration of his fund’s investments, making them potentially more exposed to a rise interest rates.Clearly, Gross is betting interest rates will remain low for some time as the world economy continues to struggle.In his “mea culpa” letter, Gross resorted to baseball analogies and metaphors. He closed his letter by saying: “This is big league ball, where your ticket holders come to the park expecting not a circus-Willie Mays-catch but more wins than losses and a year-end performance that places your bond assets near the top of the standings.”He added, “Baseball metaphors aside, we know why PIMCO Total Return is arguably the largest and hopefully the greatest bond fund in the world.”


Real Business Leaders Want to Save Capitalism

A few weeks ago I was visited in my office by the chairman of one of the country’s biggest high-tech firms who wanted to talk about the causes and consequences of widening inequality and the shrinking middle class, and what to do about it.

I asked him why he was concerned. “Because the American middle class is the core of our customer base,” he said. “If they can’t afford our products in the years ahead, we’re in deep trouble.”

I’m hearing the same refrain from a growing number of business leaders.

They see an economic recovery that’s bypassing most Americans. Median hourly and weekly pay dropped over the past year, adjusted for inflation. 

Since the depths of the Great Recession in 2009, median real household income has fallen 4.4 percent, according to an analysis by Sentier Research. 

These business leaders know the U.S. economy can’t get out of first gear as long as wages are declining. And their own businesses can’t succeed over the long term without a buoyant and growing middle class.

They also recognize a second danger.

Job frustrations are fueling a backlash against trade and immigration. Any hope for immigration reform is now dead in Congress, and further trade-opening agreements are similarly moribund. Yet the economy would be even worse if America secedes into isolationism.

Lloyd Blankfein, CEO of Goldman Sachs, warned recently on “CBS This Morning” that income inequality is “destablilizing” the nation and is “responsible for the divisions in the country.” He went on to say that “too much of the GDP over the last generation has gone to too few of the people.” 

Blankfein should know. He pulled in $23 million last year in salary and bonus, a 9.5 percent raise over the year before and his best payday since the Wall Street meltdown. This doesn’t make his point any less valid. 

Several of business leaders are suggesting raising the minimum wage and increasing taxes on the wealthy.

Bill Gross, Chairman of Pimco, the largest bond-trading firm in the world, said this week that America needs policies that bring labor and capital back into balance, including a higher minimum wage and higher taxes on the rich. 

Gross has noted that developed economies function best when income inequality is minimal.

Several months ago Gross urged his wealthy investors, who benefit the most from a capital-gains tax rate substantially lower than the tax on ordinary income, to support higher taxes on capital gains. “The era of taxing ‘capital’ at lower rates than ‘labor’ should now end,” he stated. 

Similar proposals have come from billionaires Warren Buffett and Stanley Druckenmiller, founder of Duquesne Capital Management and one of the top performing hedge fund managers of the past three decades. Buffett has suggested the wealthy pay a minimum tax of 30 percent of their incomes.

The response from the denizens of the right has been predictable: If these gentlemen want to pay more taxes, there’s nothing stopping them. 

Which misses the point. These business leaders are arguing for changes in the rules of the game that would make the game fairer for everyone. They acknowledge it’s now dangerously rigged in the favor of people like them.

They know the only way to save capitalism is to make it work for the majority rather than a smaller and smaller minority at the top.

In this respect they resemble the handful of business leaders in the Gilded Age who spearheaded the progressive reforms enacted in the first decade of the twentieth century, or those who joined with Franklin D. Roosevelt to create Social Security, a minimum wage, and the forty-hour workweek during the Depression.

Unfortunately, the voices of these forward-thinking business leaders are being drowned out by backward-lobbying groups like the U.S. Chamber of Commerce that are organized to reflect the views of their lowest common denominator.

And by billionaires like Charles and David Koch, who harbor such deep-seated hatred for government they’re blind to the real dangers capitalism now faces.

Those dangers are a sinking middle class lacking the purchasing power to keep the economy going, and an American public losing faith that the current system will deliver for them and their kids.

America’s real business leaders understand unless or until the middle class regains its footing and its faith, capitalism remains vulnerable.

Bonds, bonds everywhere - but not enough liquidity

image

Nearly $800 billion worth of securities changes hands every day in the U.S. bond market. Yet the largest bond investors in the world aren’t sure the market is deep enough to handle sudden, heavy selling in turbulent conditions. 

On a panel discussion I moderated Monday at the annual meeting of Wall Street trade group SIFMA, PIMCO CEO Doug Hodge, TIAA-CREF asset management chief Robert Leary and Neuberger Berman CEO George Walker each said the hazards posed by liquidity lapses in bonds have become a more pressing issue in their risk-management processes lately.

Concerns about insufficient liquidity in the bond market have cropped up with increasing frequency over the past year or so.

Hodge pointed to the alarming air pocket in the Treasury market on Oct. 15 - when the 10-year note yield bungee-jumped from 2.20% down to 1.87% then shot back above 2% - as a clue to how trading even in the largest instruments may be less reliable. The Wall Street Journal Monday noted that this episode is drawing close scrutiny by professional investors and regulators.

Stiffer capital rules and restrictions on proprietary trading have led banks to cut back on their market-making activities as dealers in bonds, which are traded over the counter by phone and on private electronic networks. The value of bonds that dealers hold “in inventory” for market making has plunged, even as the total amount of bonds floated is at a record.

In mid-2013, I described how the bond market’s newly arranged “plumbing” was untested under these regulatory constraints and after a record binge of new bond issuance and a long period of declining interest rates.

While the October gyrations were perhaps a warning of potential whippy action to come, Walker points out that the system hasn’t been “stress tested” yet.

One area of uncertainty is exchange-traded funds that have become important players in segments of the credit markets such as high-yield bonds, with the iShares iBoxx High Yield Corporate Bond (HYG) and SPDR Barclays High Yield Bond (JNK) ETFs together holding more than $23 billion in assets.

While these vehicles have given small investors handy, low-cost access to the key junk-bond indexes, they promise real-time liquidity to their shareholders - which means the funds are nearly price-blind buyers and sellers to accommodate client flows.

They promise a degree of liquidity to their investors that may, in the moment, outstrip the liquidity of the underlying bonds held by the funds. This can likely only be resolved through much lower prices to the seller of the paper.  

Hodge also pointed out that in recent years the fixed-income markets have seen unprecedented levels of active involvement by the Federal Reserve, as the Fed executed its trillions in bond purchases as it kept short-term official interest rates near zero.

This has made the markets acutely sensitive to perceived shifts in the Fed’s intentions, seen last year when then-Chairman Ben Bernanke sparked a stampede out of Treasuries by merely hinting that the Fed might “taper” its bond-buying pace soon.

The Fed has reportedly considered the idea of imposing exit fees on bond mutual funds as a way to stem rapid outflows. The rationale here is that bond funds are a huge creditor to the world, with aspects of a “shadow banking system,” so the fees would ostensibly be a means to promote system stability.

None of the executives thought that exit fees, which of course would penalize those investors who most needed to remove their money in a pinch, were a good idea.

Each of them did mention that they take the liquidity of the assets they own into account in assembling portfolios and managing investor expectations for how bond funds might perform. Walker of Neuberger offered that issues of fixed-income liquidity have become “a board-level discussion” at his firm

Still, we won’t know how the system behaves unless and until we see some violent moves in interest rates or money flows hit it.


A new article has been published on www.brianbrown.net

New Post has been published on http://www.brianbrown.net/2014/10/16/pimco-theres-a-perfect-storm-coming-for-bond-markets/

PIMCO: There’s A ‘Perfect Storm’ Coming For Bond Markets

Bond markets are heading for a “perfect storm,” according to Andrew Bosomworth, head of PIMCO’s German portfolio management. Bosomworth was speaking to Bloomberg’s Countdown program early Friday

As if to prove a point, the Greek government’s 10-year bond yield spiked above 9%. The cost of servicing Greece’s government debt is now at its highest level in 2014 so far, pretty much killing the government’s plan to leave its bailout early.

And according to a note from Pantheon Macroeconomics this morning, though they are still low in comparison to their euro crisis highs, we are seeing “clear and acute signs of stress in Portugal, Spain and Italy.”

Investing.com

SEE ALSO: 
Greece’s Plan To End Its Bailout Is Now Looking Ridiculous


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Pimco Paid Gross, El-Erian Over Half A Billion Dollars In 2013 Bonuses

And a stunner just out of of Bloomberg:

  • PIMCO PAID GROSS $290 MILLION BONUS FOR 2013, DOCUMENT SHOWS
  • PIMCO PAID FORMER CEO EL-ERIAN ABOUT $230 MLN BONUS IN 2013

More from the source:

Pacific Investment Management Co. paid its former Chief Investment Officer Bill Gross a bonus of about $290 million in 2013, a year in which his Total Return Fund trailed a majority of peers, according to documents provided to Bloomberg View by someone with knowledge of Pimco’s bonus policies.

Mohamed El-Erian, 56, the former chief executive officer who previously shared the title of CIO with Gross, received a 2013 bonus of about $230 million, according to figures first reported today by Bloomberg View columnist Barry Ritholtz.

By comparison, Laurence D. Fink, CEO of BlackRock Inc., the world’s biggest money manager, received $22.9 million in 2013 compensation, and Michael Diekmann, CEO of Pimco’s parent Allianz SE, was paid 7.2 million euros ($8.99 million), regulatory filings show.

“While Pimco does not comment on compensation, the figures provided to Bloomberg are not correct,” said Dan Tarman, a spokesman for Newport Beach, California-based Pimco, declining to specify the firm’s objections. “For more than three decades, Pimco’s managing directors have maintained a substantial interest in the firm, currently 30 percent of profits, and this provides an important means to attract and retain the best investment talent to serve our clients.”

Which begs the question: is one valued more on managing the world’s largest bond fund (excluding the riskless Federal Reserve LLC hedge fund of course) and by its performance, or lack thereof, or on being the “straight to CNBC/BBG” pundit-slash-diva-slash-columnist-slash-blogger, i.e., marketer. Or an even bigger question: for that money can’t one come up with more credible “departure” reasons. Recall:

A globally-respected financier has revealed that he quit his job running a $2 trillion investment fund after his young daughter wrote him a note pointing out that he had missed 22 landmark events in her life.

Mohamed El-Erian’s ten-year-old told her dad that he had skipped her first day of school, Halloween parade, her first soccer game of the year and many recitals because he was too busy at work.

The California-based investment guru’s resignation in May 2013 shocked the financial world. However in a recent interview, Mr El-Erian, who made $100 million in 2011 alone, explained that his young daughter and wife Jamie were at the heart of his decision.

In an essay for Worth in June, El-Erian, 56, explained his decision. He said: ‘About a year ago, I asked my daughter several times to do something - brush her teeth, I think it was - with no success.  ‘I reminded her that it was not so long ago that she would have immediately responded, and I wouldn’t have had to ask her multiple times; she would have known from my tone of voice that I was serious.

One wonders how many Americans dads would miss every event of their child’s upbringing for a tiny fraction of that bonus, and further to that, perhaps that very question is at the core of why there happens to be just a little “resentment” toward the bailed-out US financial class in the past 5 or so years.










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This year we had the worst equity fund managers of the decade. Well done!

This year we had the worst equity fund managers of the decade. Well done!

For many fund managers, 2014 has been a more difficult year than any other in the preceding decade. This lack of performance has precipitated a great deal of criticism from many private and institutional investors. According to a stock market report published by Bank of America Merrill Lynch, no more than 20 percent of fund managers have been successful in beating the market through the end of…

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Pimco flagship fund slightly reduces U.S. government holdings in October

Pimco flagship fund slightly reduces U.S. government holdings in October

NEW YORK (Reuters) – Pimco’s flagship Total Return fund, whose long-time manager Bill Gross unexpectedly departed on Sept. 26, ended October with a slight decrease in U.S. government-related holdings and a slight increase in mortgage-backed securities.




Reuters: Business News

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Pimco flagship fund slightly reduces U.S. government holdings in October – Reuters: Business News



The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012.

Credit: Reuters/Lori Shepler


(Reuters) – Pimco’s flagship Total Return fund, whose long-time manager Bill Gross unexpectedly departed on Sept. 26, ended October with a slight decrease in U.S. government-related holdings and a slight increase in mortgage-backed securities.

It was the first look into a full month’s holdings under the new three-person management team — Scott Mather, Mark Kiesel and Mihir Worah — since Gross’ exit.

Investors have yanked more than $50 billion out of the Total Return Fund since Gross left, but it still retains about $171 billion, making it the largest actively managed bond fund.

The Pimco Total Return Fund had exposure of 35 percent in U.S. government-related securities in October, down from 38 percent the previous month and 41 percent in August, according to the Newport Beach, Calif.-based firm’s website on Wednesday.

The U.S. government category may include nominal and inflation-protected Treasuries, Treasury futures and options, agencies, FDIC-guaranteed and government-guaranteed corporate securities, and interest rate swaps.

The fund’s exposure in Emerging Markets increased significantly to 16 percent in October, up from 10 percent of the portfolio’s assets in September, Pimco said.

The Pimco Total Return Fund also increased its exposure in mortgages, its second biggest holdings next to U.S. government-related bonds, to 22 percent in October, up from 20 percent the previous month, Pimco added.

Pimco left its exposure in U.S. credit unchanged at 13 percent in October and slightly increased its holdings in non-U.S. developed debt to 12 percent in October from 11 percent in September.

The Pimco Total Return Fund saw a huge decrease in cash equivalents at 46 percent in October, compared with 53 percent of the portfolio in September.

But that was being counterbalanced by a negative 50 percent exposure in a category described as “net offset related to derivatives.” In comparison, it was negative 51 percent in September.

The derivatives category involves offsets associated with investments in futures, swaps and other derivatives. Such offsets may be taken at the notional value of the derivative position, which in certain instances may exceed the actual amount owed on such position, Pimco said.

Rob Arnott, chairman of Research Affiliates and external subadvisor to Pimco’s All Asset and Fundamental Index strategies, said he had made Total Return his third-largest personal investment in the week after Gross left.

“It has a defensive character, consonant with my worldview and because I really liked the fact that Total Return would be modestly more concentrated in Pimco’s most favored assets, noting that flows in or out of a fund will tend to have this effect,” he said. “I made it a top personal holding also as a statement of support for the transition team.”

(Reporting By Jennifer Ablan; Editing by Chris Reese and Diane Craft)

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Pimco flagship fund slightly reduces U.S. government holdings in October
Reuters: Business News
Jennifer Ablan

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November 12, 2014 at 09:27PM | Internet Technology Business
Pimco flagship fund slightly reduces U.S. government holdings in October – Reuters: Business News
VIDEO: Rivals Outdo Gross in Race for Bond Cash

VIDEO: Rivals Outdo Gross in Race for Bond Cash

Since Bill Gross joined Janus Capital, his new fund has attracted about $430 million in new money, or less than 1% of the $50 billion that has left his old fund at Pimco in the past two months. Colin Barr joins MoneyBeat. Photo: Getty.

(more…)

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Pimco could withstand extra $300-$350 billion outflows over two years: Morningstar

Pimco could withstand extra $300-$350 billion outflows over two years: Morningstar

NEW YORK (Reuters) – Pacific Investment Management Co can withstand additional outflows of about $ 300 billion to $ 350 billion over the next two years before its portfolio management operation is impaired, according to research firm Morningstar Inc on Tuesday.




Reuters: Business News

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Pimco Total Return Fund decreases U.S. government holdings in October – Reuters: Business News



The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012.

Credit: Reuters/Lori Shepler


(Reuters) – The Pimco Total Return Fund, whose long-time manager Bill Gross unexpectedly departed on Sept. 26, ended October with a slight decrease in U.S. government-related holdings and a slight increase in mortgages, the first full month under the portfolio’s new three-person management team.

The Pimco Total Return Fund had exposure of 35 percent in October, down from 38 percent in U.S. government-related securities in September and 41 percent in August, according to the Newport Beach, Calif.-based firm’s website on Wednesday.

The U.S. government category may include nominal and inflation-protected Treasuries, Treasury futures and options, agencies, FDIC-guaranteed and government-guaranteed corporate securities, and interest rate swaps.

(Reporting By Jennifer Ablan; Editing by Chris Reese)

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Pimco Total Return Fund decreases U.S. government holdings in October
Reuters: Business News

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November 12, 2014 at 08:24PM | Internet Technology Business
Pimco Total Return Fund decreases U.S. government holdings in October – Reuters: Business News
Pimco Total Return Fund decreases U.S. government holdings in October

NEW YORK (Reuters) - The Pimco Total Return Fund, whose long-time manager Bill Gross unexpectedly departed on Sept. 26, ended October with a slight decrease in U.S. government-related holdings and a slight increase in mortgages, the first full month under the portfolio’s new three-person management team.








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VIDEO: Pimco Total Return Turmoil May Bring 401(k) Change

VIDEO: Pimco Total Return Turmoil May Bring 401(k) Change

Retirement plans have a lot invested in the Pimco Total Return Fund, and could make changes in coming months as a result of Bill Gross’s departure. Investors and their financial advisers should keep apprised of plans’ intentions.

(more…)

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Pimco claims that investors withdrew $27.5 billion from its flagship Total Return fund in October. The withdrawals effectively shrinked the size of the bond fund, the world’s largest, to $171 billion.

In its release, Pimco pointed out that nearly half of the above sum was removed in the five days following the shock departure of its manager and co-founder, Bill Gross. Gross has since joined rival Janus.

Pimco could withstand extra $300-$350 billion outflows over two years: Morningstar – Reuters: Business News



An undated handout photo of Pimco’s headquarters in Newport Beach, California.

Credit: Reuters/Pimco/Handout


(Reuters) – Pacific Investment Management Co can withstand additional outflows of about $300 billion to $350 billion over the next two years before its portfolio management operation is impaired, according to research firm Morningstar Inc on Tuesday.

Pimco is struggling to stem redemptions after the unexpected departure of co-founder Bill Gross on Sept. 26, an event that has triggered another round of speculation in the bond market over leadership stability and a possible separation from its parent Allianz SE.

Morningstar based its outflow estimate on the assumption that redemptions are orderly, Allianz continues its support and Pimco has strong firm-wide fund performance, Sumit Desai, an analyst at Chicago-based Morningstar, said in a webinar Tuesday to discuss the firm.

Last week, Pimco reported outflows of $48.3 billion across its open-ended funds in October, adding to $25.5 billion of withdrawals in the previous month, Morningstar said.

In the event investors gradually withdrew $350 billion from Pimco over two years, it would represent about 19 percent of total assets, based on data showing the Newport Beach, California asset manager held $1.87 trillion in funds as of Sept. 30.

A majority of Pimco’s firm-wide outflows in October stemmed from investors pulling money from its flagship Pimco Total Return Fund, which was managed by Gross. Doug Hodge, chief executive officer of Pimco, said at a conference on Monday that outflows have tapered somewhat since a huge spike on the day of Gross’ exit.

Morningstar said Pimco “is likely more stable than it was prior to Bill Gross’ departure — yet it will take time to see how the post-Gross Pimco jells, with many key players taking on new responsibilities.”

Morningstar said the “wild cards” for Pimco include bond market volatility and a rebalancing out of fixed income.

Ryan Mendy, chief operating officer of the Edge Consulting Group, a research firm that focuses solely on spinoffs and special situations, said the outflows and organizational changes are weighing on Pimco’s brand.

“We still maintain a view that Pimco should be spun off into a separate entity,” Mendy said. “Without a Bill or Mohamed (El-Erian) at the helm, Pimco is deprived of both brand and human face. A colossal vertical mountain for a PR damaged company to climb. Pimco’s board needs to demonstrate that they can protect both investors and their money by taking action.”

He said a spinoff “would lead to a distinct, focused entity creating more value for the investors and shareholders.”

Pimco declined to comment on Morningstar’s and the Edge’s reports.

(Reporting by Jennifer Ablan; Editing by Andrew Hay, Bernard Orr and Lisa Shumaker)

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Pimco could withstand extra $300-$350 billion outflows over two years: Morningstar
Reuters: Business News
Jennifer Ablan

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November 11, 2014 at 11:57PM | Internet Technology Business
Pimco could withstand extra $300-$350 billion outflows over two years: Morningstar – Reuters: Business News