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

Christine Benz
Russel Kinnel

Christine Benz: Hi, I'm Christine Benz for 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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Benz: Another bet, you say--in addition, a contrarian bet--is a bet on Treasury Inflation-Protected Securities. Let's talk about that and how that has worked for them so far.

Kinnel: So, this is obviously much more of a core kind of bet. You wouldn't be surprised that the fund owns TIPS. So, the idea--which is not too different from the one we were talking about before--is that if the U.S. economy is strengthening, then certainly the chances of inflation have grown. I think, in their view, TIPS look pretty cheap, and TIPS have actually done relatively well. Again, we're talking about small numbers. The bonds have had a modest positive return this year. It hasn't been a huge rally this year.

Benz: Taking a step back, when you look at the fund's positioning and some of the strategies in place under the new team, do they resemble the types of strategies that the fund used when Bill Gross was in charge of the fund?

Kinnel: Yes, very much. It's always been a pretty wide-ranging, aggressive fund that makes big macro calls. So, yes, it's very much in keeping with the PIMCO Total Return we knew under Bill Gross.

Benz: One thing I know that you and the team have been watching really closely is this issue of ongoing redemptions. I guess we've seen signs that they've tapered off a little bit recently, but they still have been enormous since Bill Gross left. Let's talk about those outflows and how, if at all, they have intersected with performance so far.

Kinnel: There was an absolutely massive amount of outflows when Bill Gross left--about $32 billion in the biggest month for the fund. That's gradually come down to about $6 billion in outflows in April, which is still a lot. But with a liquid portfolio like they run, it really hasn't had any measurable impact on the fund. So, the fund has been able to perform well, and it doesn't appear that it has really had a big impact.

Part of it is because everything is pretty liquid. Part of that is because, even before Gross left, the fund was in redemptions and had long been holding a lot of cash and cash-like holdings. That has helped them to handle the outflows. And of course, they see the outflow trend, and they are managing accordingly, knowing they're going to have some continued redemptions to handle. So, they are not going to put everything in the less-liquid part of the bond market.

Benz: In a way, has their heavy use of derivatives actually been helpful in this scenario where they've seen outflows? Are those derivatives more liquid than, say, actual bonds?

Kinnel: Certainly some. I think a lot of the derivatives positions are pretty tradable. Of course, say, Treasury bonds are very easy to trade, but I think some others are not. So, I think not just their derivatives expertise but their huge trading desk and all of their expertise in moving large amounts of bonds have certainly served them well in the last few months.

Benz: Russ, thank you so much for being here to share your insights.

Kinnel: You are welcome.

Benz: Thanks for watching. I'm Christine Benz for