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By Christine Benz and Timothy Strauts | 06-19-2013 03:00 PM

Worries About PIMCO Total Return Overblown

The recent slip in performance of PIMCO's Total Return mutual fund and ETF is no reason for investors to sell shares, as the funds have strong track records, say Morningstar's Tim Strauts and Eric Jacobson.

Christine Benz: Hi, I'm Christine Benz for PIMCO's flagship Total Return fund has recently encountered a little bit of performance turbulence. Joining me to discuss that issue are two of Morningstar’s senior fund analysts, Tim Strauts and Eric Jacobson. Eric is on the phone with us, and Tim is here in the studio.

Gentlemen, thank you so much for being here.

Tim Strauts: Thanks for having me.

Eric Jacobson: Thanks, Christine.

Benz: Let’s discuss what has been behind the recent performance weakness. Tim, can you add any color to that question?

Strauts: So, in the last three-month period, the mutual fund and the exchange-traded fund have both underperformed their broader categories and the broader Barclays Aggregate Bond Index benchmark. It looks like one of the main factors was an allocation to emerging-markets debt, which PIMCO has been very bullish on during the last few years and has been positive performance longer term. But just in the last few months that market has sold off pretty strongly.

Benz: Eric, any other color to add on the recent performance weakness?

Jacobson: The only other thing I would add is that the PIMCO Total Return mutual fund has a longstanding exposure to Treasury Inflation-Protected Securities--TIPS also exist, I should say, in the ETF--and TIPS have sold off quite a bit as a result of rising interest rates. The funds have a little bit more Treasuries than usual as manager Bill Gross has been ramping up there.  He has been focusing on bonds with five- to 10-year maturities, and those actually weren’t as big a problem as the TIPS were.

Benz: When you think back to the last period of significant performance weakness at least in relative terms, you think back to a couple of years ago, right, Eric, where the fund and a lot of other intermediate-term bond funds underperformed because it didn’t own as much in Treasuries as the Barclays Aggregate Bond Index. What would you say about the underperformance recently? Do you think it’s just a natural byproduct of a truly active manager?

Jacobson: I mean, broadly speaking I think that’s fair. I think you can also say that it’s another misstep. They don’t happen too frequently with Bill Gross, but occasionally they do. It hasn’t been a major, major misstep yet. But it was a pretty bad month in May certainly, and it’s the kind of error you expect to get. I will say, though, that it’s been a lot harder for all funds to match the benchmark up and down at the same time, just because they have been investing a little bit away from it in the last few years.

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