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By Christine Benz and Eric Jacobson | 09-30-2013 12:00 PM

PIMCO Total Return Is Weathering the Storm

The bond behemoth is having a year to forget, but Morningstar senior fund analyst Eric Jacobson believes this Gold-rated fund's long-term track record has earned investors' patience.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Many investors delegate their portfolios' fixed-income components to PIMCO. Joining me to discuss three of the firm's biggest bond funds is Eric Jacobson. He is a senior fund analyst with Morningstar.

Eric, thank you so much for being here.

Eric Jacobson: Glad to be with you Christine.

Benz: Eric, you recently spent a lot of time at PIMCO, so we thought it would be interesting to cycle through the firm's biggest bond funds and talk about your outlook for them, as well as how they're positioned currently. Let's start with PIMCO Total Return. It's having a year to forget so far in 2013. Let's talk about what has been behind its recent underperformance.

Jacobson: Well, there are few things going on there, but one of the biggest is really that the fund has had a fairly sizable allocation to TIPS--it's run between 10% and 12% in the last several months. The big story that we've been hearing from a lot of managers, not just PIMCO, is that there are these so-called risk-parity funds, which use a particular style to their asset allocation.

Benz: Are they hedgie-type funds?

Jacobson: It's really about how to do asset allocation across different sectors. It's slightly different than some of the conventional methods, really focusing on risk factors that they model, rather than just what the sectors are. But a lot of these portfolios have leverage in them, and there are some that are being buzzed around in the industry suggesting that during this most recent sell-off, the models told them to dump their TIPS allocations. So there is a perception out there that TIPS really, really underperform more than they otherwise would given this environment. The interesting thing, though, was that [manager Bill] Gross was committed to the sector, he views it as an insurance policy naturally against inflation being higher than the level at which they're currently priced. So it doesn't sound like he has any intention to get away from them despite this. He still thinks they are valuable part of the portfolio.

Benz: What is Gross' current thinking on interest-rate positioning?

Jacobson: In general, he's still being very cautious on interest rates. He looked to take on a little bit more interest-rate risk after the sell-off, feeling that Treasuries have been oversold. But, by and large, he's trying to steer the fund toward other sources of return and generally not taking benchmark or longer-than-benchmark-like duration positions.

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