Fund Spy
When Bill Gross sells bonds, should you?
Here's what the bond titan's move out of his fabled Pimco Total Return fund means to investors.
By Kunal Kapoor, Morningstar
With more than $70 billion in assets, Pimco Total Return (PTTRX) is about as big as it gets in the fund world. And its manager Bill Gross' larger-than-life persona is not only a reflection of the amount of money he runs -- the mutual fund is only a slice of the assets he oversees -- but also a comment on the power and influence he wields over the bond markets.
In the past, Gross has stepped up to the plate to challenge the likes of General Electric (GE, news, msgs) for the manner in which the company treats its bondholders. More recently, he's become concerned about increasing budget deficits in the United States, and as recently as last Tuesday, Gross penned a piece in The Washington Post further expounding on his concerns.
The news that might be of most interest to investors, however, is that Gross has sold his holdings in Pimco Total Return, believing that better opportunities lie elsewhere. Given that the fund is required to invest most of its money in investment-grade debt, which Gross believes will be hurt by increasing deficits, the falling dollar, and the potential for rising interest rates, the move is consistent with his public stance. (The New York Times reports that Gross has moved money into closed-end municipal-bond funds, commodity derivatives and Treasury inflation-protected securities.)
The impact on investors
So, what does all this mean for investors, particularly those in his fund?
First, it's worth stressing that, as we've been saying for a while, bond funds do indeed offer the potential for losses, especially in a rising-rate environment. Too many investors have come to view them as a purely defensive asset class, and while it's true that they will never come close to matching stock funds on the downside, they are not free of risk.
More specifically, investors who are particularly concerned about preserving capital may want to increase their allocation to ultrashort- and short-term bond funds, and potentially to cash. While this will immediately have the effect of lowering any income you receive from these holdings, such funds will do a better job of preserving capital than would a conventional intermediate-term fund.
For those willing to increase the level of risk in their portfolios, it may make sense to follow Gross' lead and increase one's allocation to funds that invest in TIPS, or an offering such as Pimco CommodityRealReturn Strategy (PCRIX), which has its fortunes linked to commodity futures.
Goat of the week
On another topic, thumbs down to the Evergreen Funds family, which announced recently that its 12b-1 fees are rising from 0.25% to 0.30%. Evergreen, which isn't known for its low expenses, is likely raising fees to boost its sales and marketing efforts. Already, investors in funds such as Evergreen Omega (EKOAX) and Evergreen Aggressive Growth (EAGAX) have seen fees hiked in the past year. Omega's expenses, for instance, have soared from 1.18% in 2000 to 1.67% in 2003, an unconscionable jump in such a short period. (That's a 41% rise for those of you keeping score.)
While many have speculated that the Spitzer-led probe into various fund company practices might finally force some fund companies to lower expenses, it's clear that in many ways, it's still business as usual in the industry. Evergreen has pointed out that it's only bringing its 12b-1 fees in line with other "adviser-distributed peers." That's a common excuse in the fund industry, and a lame one at best.
Copyright 2004. Morningstar, Inc. All rights reserved.
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