PIMCO's Total Return Bond Fund - Potentially back on buy list

Bill Gross's $200 Billion Fund Flees U.S. Bonds into Foreign Assets


Jan. 20, 2010, 12:08 AM

Latest data from PIMCO's Total Return bond fund shows how manager Bill Gross has massively shifted his fund's allocation into the foreign bonds of developed countries.

As shown in the table below, taken from the latest fourth quarter Pimco report, 'Non U.S. Developed' debt has jumped to 16% of the portfolio vs. just 3% the quarter before. That's an enormous shift in exposure given that it happened over just three months for this $200 billion fund.

(Click on chart to enlarge it for easier viewing)

Furthermore, he's slashed his exposure to both U.S. 'Government-Related' (to 32% from 48%) and 'Mortgage' (to 17% from 22%) securities. 'Net Cash Equivalents' meanwhile spiked to 8% of the fund vs. 2% in September. It's pretty clear Mr. Gross expects a rocky road ahead for U.S. fixed income:

PIMCO Q4 Total Return Fund Report: While PIMCO does not expect the Fed to tighten any time soon, there is still the question of how negatively markets will react as the Fed winds down its unorthodox policies that were designed to inject liquidity into the financial system. These policies include the Fed’s program of purchasing mortgage-backed securities.

The current environment is characterized by a high level of policy uncertainty and relatively rich valuations for many fixed income assets. This setting argues for caution in terms of overall risk exposure in portfolios, but PIMCO believes there are still a number of prudent strategies available to enhance potential.

Emerging Markets and Currency – PIMCO plans to take exposure to high quality EM credits such as Mexico, Brazil, Korea and Russia, which have low levels of debt relative to the size of their economies. We also will look to take positions in select EM currencies, such as Brazil and China, anticipating that faster growth in these economies should allow their currencies to gain versus the U.S. dollar.

In light of the shift in the asset mix of the world's largest bond fund, I have put PIMCO's Total Return bond fund (PTTAX) back on the potential buy list.