(PUB) Morningstar FundInvestor

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A Stumble From Bill Gross Income Strategist | Eric Jacobson

Gross uses a mix of macroeconomic forecasting (supported by PIMCO ’s investment committee) and bottom-up analysis (supported by PIMCO ’s sector specialist desks) to determine interest-rate, yield- curve, currency, country, sector, and issue-level decisions. He has relied mostly on decisions at the sector level and above for many years, given the enormous number of assets he manages across ac- counts with the same or similar mandates as this. Despite the limitations of size, the breadth of Gross’ tool kit is still notable. He made significant interest- rate and yield-curve plays (to the fund’s detriment) in 2011 and took on meaningful exposures to non-U.S. developed markets (roughly 18% in December of that year), emerging-markets debt ( 10% ), and municipals ( 4% ) relative to the fund’s benchmark, the Barclays U.S. Aggregate Bond Index. The fund was also more adventurous than most in the intermediate-term bond peer group. It’s difficult to quantify the fund’s use of derivatives, but while they’ve been cutting back, Gross and PIMCO historically have used as many or more (in both variety and volume) than just about any of their competitors. The level of analy- tical research and operational support backing these is intense. In the months leading up to the latest sell-off, PIMCO argued that most asset classes were fully valued, and the portfolio looks more conservative than it has in a while, hewing closer to the Aggregate Index. As of May 31 , its duration was slightly short of the bench- mark, its Treasury-sector focus was on intermediate maturities, and its investment-grade credit exposure was light relative to the bogy ( 6% versus 22% ). The fund also slashed its mortgage weighting to 34% . perfection from this fund, but they’re otherwise bumps in a long road of great success. Gross has continued to show, in both bull markets ( 2012 ) and bear ( 2008 ), that the fund can still excel. Its solid longer-term returns and moderate volatility have combined to form an excellent record. œ Contact Eric Jacobson at eric.jacobson@morningstar.com The fund’s occasional stumbles may be particularly disappointing to investors who have come to expect

It’s too soon to harshly judge the missteps of PIMCO Total Return PTTRX or near clones Harbor Bond HABDX and Managers PIMCO Bond MBDFX . Conventional Treasuries are not to blame this time around, but rather Treasury Inflation-Protected Secu- rities. Manager Bill Gross has long held a stake in the sector ( 12% in April 2013 ), and it proved sensitive to the spike in long-maturity yields that began in May 2013 . Exposure to emerging-markets debt ( 8% ) has hurt as well. The fund tumbled 3 . 6% in the second quarter and sat in the category’s bottom quar- tile for the year through June. By contrast, the fund’s 2011 ’s troubles were about the Treasuries that Gross didn’t own. Credit-sensitive portions of the market were spooked by financial trouble in the European Union during that year’s third quarter, and Treasuries rallied. Gross had slashed them earlier that year, which left the fund nursing a loss for the quarter as benchmarklike funds posted gains. That error put its mark on the fund’s entire year; it placed in the category’s bottom quartile. Macro bets of those kinds have come to dominate the fund’s high-level decision-making in recent years, and Gross’ tool kit has narrowed some as the assets under his command have ballooned. The fund’s sec- tor successes, however, highlight the breadth and depth of skill and ability that subadvisor PIMCO still brings the table. The fund had a much better 2012 , for example, with a 10 . 4% gain. And while it did benefit from good Treasury yield-curve positioning, the fund scored the bulk of its outperformance in other markets. Both agency and nonagency mort- gages made important contributions, for example, as did exposures to investment-grade corporates, junk bonds, and emerging-markets debt.