Over 40 years ago, Bill Gross founded PIMCO. It was certainly good timing because the US was about to start a secular bull market in bonds. And yes, Gross was a bond maestro.
Now Pimco manages $1.2 trillion in assets and has nearly 500 investment professionals. Gross is also worth a cool $2.1 billion.
Interestingly enough, he thinks that US Treasuries may be poised for a drop. The main reason is the ending of the Federal Reserve’s easy money policy, known as QE2. It’s a controversial position but that is fine with Gross. Some of the best investments are contrarian plays.
So what are the standout PIMCO funds? Here’s a look:
PIMCO Total Return Fund
The PIMCO Total Return (MUTF: PTTAX) fund, which has a whopping $240 billion in assets, is the firm’s flagship fund. At the helm is Bill Gross, who has racked-up an envious track record. Over the past 15 years, the average annual return was 7.15%. That’s pretty good for a bond fund.
As should be expected, the fund is light on U.S. Treasuries. In fact, Gross has been focused on a low duration strategy for the maturities in the portfolio — at about 3.4 years. This is to help minimize the impact from higher interest rates.
So where is Gross finding value? It’s in areas that have seen some damage like municipal bonds and emerging-market debt. Gross also likes mortgage securities.
PIMCO Commodity Real Return Strategy
After a strong surge, the commodities markets have recently hit some tailwinds. So it is no surprise that the PIMCO Commodity Real Return Strategy (MUTF: PCRAX) fund has taken a hit. For the past month, the fund is down 5.61%.
Although, the damage could have been worse. Keep in mind that the Commodity Real Return fund uses derivatives – like futures and options – to play commodities markets. This makes it easier to deal with the volatility. Besides, with the excess cash, the fund has invested heavily in bonds, which provides more stability.
PIMCO All Asset Fund
With an absolute return fund, the goal is to get gains even if the general market is falling. It’s a tough thing to pull-off but is certainly a popular strategy for investors who want to preserve their wealth.
Of course, PIMCO has a fund offering for this category: the All Asset (MUTF: PASAX) fund. The goal is to achieve an absolute return of 5%, which is adjusted for inflation.
To this end, the fund invests in a blend of stocks, bonds, commodities and real estate. However, when selecting investments, the portfolio manager will tend to focus on risk-reduction.
How has the fund performed over the past five years? It’s an average annual return of 6.74%.
PIMCO Emerging Local Bond Fund
With rising inflation and a surge in capital flows, the emerging markets have seen lots of volatility. But there is a way to invest in these markets with relatively lower risks: bond funds.
One to consider is the PIMCO Emerging Local Bond (MUTF: PELAX) fund, which has $7.5 billion in assets. What makes the fund interesting is that the investments are in local currencies. This actually helps to provide more diversification.
What’s more, the fund tends to focus on high-quality bonds, such as from sovereigns. These include countries like Brazil, Poland, South Africa and Thailand.
PIMCO Real Return Fund
As the name implies, Treasury Inflation Protected Securities (TIPS) are bonds that adjust when there is a change in inflation. Actually, Gross believes that inflation will be a long-term problem for the US.
So to get exposure to TIPS, there is the PIMCO Real Return (MUTF: PRRDX) fund. Interestingly enough, about 20% of the portfolio can be other securities. This is definitely a big advantage because PIMCO has a diverse set of investments that can help boost overall returns.
For example, the Real Return fund has made bets on emerging markets debt and US corporate bons. There are even short positions in U.S. government securities.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
