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By Christine Benz and Russel Kinnel | 05-27-2015 03:00 PM

PIMCO Total Return's Dollar Bet Has Been a Wild Ride

The flagship fund's strong bet on the greenback has driven both top- and bottom-quartile performance in recent months.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. It's been roughly nine months since Bill Gross stepped down from PIMCO Total Return (PTTRX). Joining me to discuss the latest developments at the fund since then is Russ Kinnel. He is director of fund research with Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: Russ, it has been roughly nine months since Bill Gross stepped down and went to Janus last fall. Let's discuss performance since then and specifically performance year to date. It's been kind of a wild ride--not in absolute terms, but certainly relative to other intermediate-term bond funds.

Kinnel: Yes, [the fund has] been performing well, but as you say, in relative terms, it's really swinging up and down. At the end of April, it was top quartile; a couple of weeks into May, it was bottom quartile. As we speak today, it's almost all the way back to top quartile. So, it's really been bouncing up and down and, interestingly, the biggest factor there relative to peers is a dollar bet. They bet strongly on the dollar. The idea being that the U.S. economy is strong, and the Fed is close to starting to raise rates and tapering its bond-buying program. Europe's at the other end; their economy is weaker, and they are looking at quantitative easing. Japan is doing something similar. Europe also has Greece and its mess hanging over it.

So, the basic idea is that all of these things should be good fundamentals for the dollar. As a result, PIMCO has got a pretty sizable dollar bet. And, in fact, if you watch how the dollar does versus the euro and the yen, you can pretty much guess which direction PIMCO has gone relative to its peers on a given day.

Benz: Now, you say they have a dollar bet, and that's interesting because I think people think that this is a U.S. bond fund, so of course they have a dollar bet. But how do they implement that dollar bet?

Kinnel: PIMCO is a very big user of derivatives, so they can make very specific bets--whether it's on the dollar or they might want to make, say, a yield-curve-steepener bet, which is bond talk for betting essentially on a particular move in the yield curve. So, there are a lot of derivatives they can do. They can also own bond themselves, of course. And in general, they have core-bond-like holdings--government bonds, mortgages, corporate bonds. But they've also got foreign debt. They've got some of these derivatives. So, it's really an interesting mix of all these things together that go into its performance.

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