Report Release Date: 6 Jul 2010
Analyst: Dario Portioli
Morningstar Opinion
PIMCO GIS Total Return Bond's track record is excellent, but we think there are other reasons to like this fund.
It is common knowledge that past performance is not predictive of future results. This notion is particularly relevant for investors who now opt for fixed-income instruments, which during the past decade benefited from exceptional market conditions. Bill Gross himself, manager of this fund since inception, recently argued that bond returns overall are likely to be lower in the future, and the latest double-digit gains were clearly an anomaly. However, this argument did not prevent a large number of investors from pouring more than USD 50 billion into this offering during the last 12 months (as of the end of April 2010). While these new investors should not expect the manager to replicate past returns, we actually think there are sound reasons for this strategy to be considered as a superior alternative within its category.
The fund is managed by Bill Gross and PIMCO’s robust team of analysts, who are widely acknowledged to be among the best in the business. We have a high opinion of this group: Gross and his analysts jointly received Morningstar’s awards for Fixed Income Manager of the Decade for 2000-2009 and Fixed Income Manager of the Year for 1998, 2000, and 2007.
Investment decisions are taken on a consensus basis. In particular, the fund’s sector weightings and duration positioning are based on PIMCO’s long-term macroeconomic view and cyclical outlook. The strategy usually leads to a well diversified portfolio, even though Gross occasionally makes aggressive bets. For example, in 2008, amid the market turmoil, he built a sizable position in bonds with government support, such as agency-backed mortgage debt (which went up near 60% of assets). This position paid off in late 2008 and contributed to the fund’s strong performance over that year.
More recently, Gross sees the global recovery as uneven and worries that growth may be countered by unemployment and the cessation of government stimulus. Therefore, he is now less enthusiastic about credit sensitive bonds and prefers to minimize risks relative to the fund's benchmark (BarCap Aggregate Bond). As of April 2010, Gross did have bets on emerging markets (7%) and fiscally strong developed countries (13%), but he has also significantly cut the exposure to agency mortgage bonds.
In sum, while the fund’s excellent track record is not predictive of absolute future performance, it clearly is an indication of the quality of the team and process that shareholders can count on here. In addition, Gross so far has proved able to deal with the fund's recent growth in assets under management. Even though we believe that fees for retail investors might be more competitive given the fund’s potential economies of scale, our rating is Elite.
*The above returns are in Euro terms.
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