By Min Zeng
Bill Gross's Pimco Total Return Fund, the world's largest bond
fund by assets, is making up for lost ground this quarter.
The $229 billion fund has handed investors a total return of
1.96% this quarter through Tuesday, beating a return of 1.68% from
the Barclays U.S. Aggregate Bond Index, according to data from fund
tracker Morningstar Inc. The fund outpaced 67% of its peers.
Returns are a calculation of bonds' price appreciation and interest
payments.
The returns mark a shift from the first quarter when the Pacific
Investment Management Co. fund's 1.3% return lagged behind the
1.84% of its benchmark index. In the first quarter, 85% of Mr.
Gross's peer funds did better than he did, according to
Morningstar.
The improvement may be a balm for the embattled Mr. Gross,
co-founder and chief investment officer at Pimco. Mr. Gross has
suffered a record amount of net cash withdrawals from clients over
the past year amid poor fund performances and a surprising
management shake-up.
Overall, the fund maintains a solid long-term track record. Its
return on average over the past 15 years through Tuesday was an
annualized 6.86%, beating 96% of its peers.
The fund has posted a return of 3.29% this year through Tuesday,
compared with 3.55% return from the benchmark. The fund lags 76%
its peers.
It isn't yet clear whether Mr. Gross's fund suffered outflows in
June, but clients pulled $4.3 billion from the fund last month,
marking the 13th consecutive month of investor withdrawals.
The fund posted nearly $60 billion net outflows in the year
between May 2013 and last month. Investors are keeping a close eye
on the company's flows and performances after chief executive and
co-chief investment officer, Mohamed El-Erian, quit earlier this
year. The news stunned investors and analysts because Mr. El-Erian
had been groomed by Mr. Gross as his possible successor.
"It's been a remarkable turnabout," said Douglas Hodge, chief
executive officer at Pimco in a note published Tuesday on the
company's website.
In a commentary posted on June 4 on the firm's official Twitter
account, Mr. Gross said the total return strategy is "turning a big
corner." He added: "Watch our 12 month numbers over the next [two]
weeks and the rest of the year!"
The broad price rally in the U.S. bond market this year has also
boosted the Pimco fund's returns. Mr. Gross has positioned for
Treasury bond prices to rise, and yields to fall this year. Mr.
Gross raised its U.S. government-related holdings, which include
Treasury bonds, to 50% at the end of May from 41% in April,
according to data from Pimco's website. When bond prices rise,
yields fall.
Thus far this year, the 10-year Treasury yield has fallen to
2.56% from 3% at the beginning of January.
Over the past month, Mr. Gross has spoken about a "new neutral"
for interest rates, a key thesis for the firm's investment
strategies for the next three to five years.
Mr. Gross expects the Federal Reserve will keep rates low for a
longer period than many others. He has said the Fed would boost the
short-term interest rate to reach 2%--a level to promote full
employment and stable prices--from near 0% in coming years. Many
other investors and economists have said they expect the Fed would
boost rates closer to 4% as the economy grows.
The Fed last week dialed back the forecast for the policy rate
in the longer term to 3.75% from 4% previously forecast in
March.
Despite better returns this quarter, analysts said it is
premature to conclude whether this would stem the tide of
outflows.
"Reversing that tide won't be easy," said Jeff Tjornehoj, head
of Lipper Americas Research. Mr. Tjornehoj said the fund is still a
laggard for the year.
Write to Min Zeng at min.zeng@wsj.com