PIMCO Made A Killing

If you were to do a search on PIMCO or Bill Gross in my blog, you will find a number of articles linking him. Mainly because my views were quite similar to Bill's on issues such as Fannie & Freddie, the USD, the Federal Reserve and interest rate movements. The difference between us is that he can make huge bets on his calls. Finally, following the Fannie & Freddie takeover by the government, PIMCO scored a net gain of US$1.7bn. Gross has been agitating for months for a bigger federal role in bailing out the sinking housing market. He acknowledges his critics, who say he’s "talking his book": Because Pimco is a huge investor in mortgage-backed bonds of Fannie and Freddie, the firm and its mutual funds stand to benefit now that the government is stepping in to assure that the companies stay solvent. Pimco also will be helped as the Treasury begins to buy mortgage-backed bonds in the open market.

But Gross has asserted that the feds needed to act for the greater good of the economy and the financial system, not just for the continued health of his Pimco Total Return bond fund, the world’s largest. The US$130-billion-asset fund is up 3.5% this year, ranking it in the 96th percentile for performance among bond funds. Gross said he believed that the Treasury’s rescue plan would go a long way toward improving sentiment in the financial and housing markets.

If you thought that Fannie & Freddie would be "nationalised", you would go and buy the bonds (not the shares, mind you as shareholders will end up with practically zilch after the dust settles). Well, bonds are not exactly cheap for individual investors to buy, and bond funds does not really thrill most private investors.

Gross adjusted his portfolio early in the year by moving out of US Treasuries and corporate bonds, and into agency bonds (GSE). As of last month more than 60% of his US$132bn bond fund was in mortgage debt. No wonder he was always screaming and shouting to the media on how Fannie & Freddie needs government intervention. This may be questionable for a portfolio manager to do that - but his positions are transparent and well known, he is not hiding anything, he is putting nearly ALL his fund's money where his mouth is (unlike some local fund manager we know).

Even without the government help, Bill's mega bond fund was already up a significant 9.2% for the 12 months ended 1st August 2008. That thrashed all its peers, and the feat is even more incredible considering its also the world's biggest bond fund. Following the rescue plan on FanFred, the fund was up another 1.3% (130 percentage points) or US$1.7bn in value added. That means the fund is now returning about 10.5% for the last 12 months, incredible. Bill Gross co-founded PIMCO, and started managing the Total Return fund since 1987. His style is to take a macro view and make tactical changes based on short term movements in the economy.

The FanFred nightmare has its winners and losers. The ones who lost big include Legg Mason's Bill Miller, Dodge & Cox and Wellington. Mainly they tried to pick bottoms in the shares of FanFred.