PIMCO's Gross: I Made a Mistake | Chief Investment Officer

Pacific Investment Management Co. founder Bill Gross says he has "lost sleep" over a wrong call on US Treasury bond interest rates, which cost him in his Total Return bond fund.

(August 30, 2011) — Pacific Investment Management Co.’s (PIMCO) Bill Gross admits wrongdoing, saying that it was a mistake to cut his Treasury holdings.

In an interview with the Financial Times, Gross, the manager of the world’s largest bond fund, said that it had been a “mistake to bet so heavily against the price of US government debt.” He noted that he wishes he had invested more in US governmental debt earlier this year. “It was my/our mistake in thinking that the US economy can chug along at 2% real growth rates,” the newspaper cited Gross as saying. “The US and developed economies are near the recessionary dividing point.”

Gross said PIMCO had initially dumped the entirety of its US debt holdings in March as he expected economic growth to be higher, resulting in future inflation. The result: underperformance of PIMCO’s Total Return Fund. Since Gross’ moves, however, the US Treasury market has achieved a significant and impressive recovery.

Gross’ fund has returned 3.29% so far this year, less than the 4.55% recorded by the Barclay’s benchmark index.

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Additionally, Gross told the FT that his view on the US economy changed significantly earlier this month after the Federal Reserve pledged to keep interest rates low for at least another two years. “Freezing rates for two years, that was a pretty significant statement in terms of the vulnerability of Treasuries to go down in price and up in yield,” Gross said.

Signs of Gross becoming more optimistic over US Treasuries appeared in early July, when the $242.7 billion Total Return Fund reported that it increased its allocation of US Treasuries from 5% to 8% at the end of June. At the time, the move ran counter to Gross’ frequent and vehement denunciations of the asset class.

“[PIMCO has] been selling Treasuries because they have little value within the context of a $75 trillion total debt burden,” Gross said in April. He had previously said that the Total Return Fund would move to hold no government debt for the first time in over two years, and urged investors to “revolt” against U.S. Treasuries.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

A recent study by Keefe, Bruyette & Woods has found that the hype over alternatives among institutional investors in the US is not expected to subside.

(August 30, 2011) — A recent survey by Keefe, Bruyette & Woods (KBW) has found that alternatives have remained a popular investment choice among US institutional investors.

The survey of 37 chief investment officers or other institutional investment executives with asset allocation responsibilities discovered that alternatives are expected to gain more attention, with close to 40% saying they’re seeking to increase allocations to hedge funds and commodities. Additionally, more than 30% of respondents said they are looking to add to their real estate, infrastructure, and energy investments.

Furthermore, the firm noted that the uptick in interest in alternatives will drive greater interest in money managers such as Franklin Resources, BlackRock, Affiliated Managers Group, and T. Rowe Price.

The study by KBW follows a poll earlier this month by SEI — completed by 106 pension executives overseeing assets ranging in size from $25 million to over $1 billion — that revealed that an increasing number of pension funds are using alternatives as funded status volatility continues to be a primary concern.

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More plans are using alternatives, but there has been a decrease in the number of pension plans allocating more than 10% of the portfolio to alternative asset classes, SEI found. In addition, use of liability-driven investment (LDI) strategies is completely inconsistent — especially among the well funded plans — according to the firm.

“Alternative investments continue to be integrated into pension portfolios as another channel for mitigating risk, while providing additional return apparently. However, ongoing volatility of interest rates continues to put liability risk as a primary concern for plan sponsors,” said Jon Waite, Director, Investment Management Advice and Chief Actuary for SEI’s Institutional Group, in a statement. “The poll results show numerous inconsistencies in the use of various investment strategies, including alternatives, over the past year as plan sponsors appear to be uncertain of what’s most appropriate. This might also explain an increased interest in outsourcing as now, more than ever, plan sponsors need to maximize the benefits of external resources and the expertise they provide.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742