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Bill Gross apologizes to Pimco fund owners for 'bad year'

October 14, 2011 |  8:17 pm

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Bond guru Bill Gross is offering a big mea culpa to disappointed shareholders of his Pimco Total Return Bond fund, which is suffering through a bout of terrible performance.

In a “special edition” of his monthly investment outlook, Newport Beach-based Gross concedes that he’s “having a bad year. . . . Pimco’s centerfielder has lost a few fly balls in the sun.”

The $240-billion fund, the world’s largest bond portfolio, is up only about 1% year to date, ranking it in the bottom 20% of performance among its peers, according to Bloomberg News data. By contrast, the fund's 7.8% average annualized return over the last five years ranks it in the top 4% of bond portfolios.

Gross, 67, made a major (and well-publicized) tactical error in the first half of the year by avoiding U.S. Treasury securities, asserting that they didn’t pay enough to make them worth holding.

But the world continued to flock to Treasuries, pushing bond prices up and yields lower. Then, when panic struck markets in late July over Europe’s government-debt crisis and renewed fear of a global recession, the rush into Treasuries became a stampede.

Meanwhile, risk-averse investors suddenly dumped some of the bond sectors that Gross had favored, including emerging-market debt.

Gross writes in his letter, which the website Dealbreaker posted earlier Friday:

The simple fact is that the portfolio at midyear was positioned for what we call a “New Normal” developed world economy -- 2% real growth and 2% inflation. When growth estimates quickly changed it was obvious that I had misjudged the fly ball: E-CF or for nonbaseball aficionados -- error centerfield.

In the last two months Gross has shifted gears, boosting his Treasury holdings on the assumption that interest rates may stay low for some time because of a weak global economy. But the market turned on Gross yet again, as Treasury yields have rebounded in recent weeks. His fund is down 2.2% over the last month, making it one of the worst-performing bond funds in that period.

Gross, who loves to use metaphors in his commentaries, seeks to assure shareholders that he’s trying to get back on track:

There is no “quit” in me or anyone else on the Pimco premises. The early morning and even midnight hours have gone up, not down, to match the increasing complexity of the global financial markets. The competitive fire burns even hotter. I/we respect our competition but we want to squash them each and every day. . . .

Yet even so, can the golden glove regain its magic? Well, as I’ve indicated, we’re showing up early every day at the ballpark -- in this case for a little fielding practice. And perhaps importantly, we recognize the majesty of the stadium we’re playing in. This is big league ball, where your ticketholders come to the park expecting not a circus Willie Mays catch but more wins than losses and a yearend performance that places your bond assets near the top of the standings.

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-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

Photo: Pimco's Bill Gross. Credit: Tim Boyle / Bloomberg News

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