Seeking to Buy Troubled Mortgages, PIMCO Raises $1.5 Billion

(March 23, 2011) — The Pacific Investment Management Co. (PIMCO), manager of the world’s largest mutual fund, has raised more than $1.5 billion for a new fund to buy assets from banks looking to improve their balance sheets.

The PIMCO Bank Recapitalization and Value Opportunities (BRAVO) fund will purchase troubled commercial and residential mortgages while also investing directly in banks via securities including warrants and convertible debt, two anonymous sources told Bloomberg News. The BRAVO fund will focus its attention on smaller lenders and community banks.

The move reflects aims by PIMCO to continue its diversification efforts, illustrating attempts by fund managers to raise billions of dollars seeking to profit from a rebound in real estate. 

PIMCO is still accepting investments in the fund and expects to raise up to $3 billion in total before a final close later this year, Bloomberg reported. The fund will be reportedly managed by a team of PIMCO fund managers headed by Dan Ivascyn and Scott Simon.

Since the beginning of the global financial crisis in late 2007, PIMCO has already raised about $6.5 billion from institutional clients to buy troubled mortgages and bonds backed by real-estate loans.

The bond fund manager has recently taken steps to move away from bonds, expressing beliefs that the fixed-income rally of the past three decades is nearing its end. PIMCO’s Bill Gross has said that the $237 billion Total Return Fund will soon hold no government debt for the first time in over two years. It is also cutting its mortgage-backed securities from 42% to 34% of holdings. Instead, the fund is moving toward emerging-market debt, upping its holdings in this category to 10% of its total assets.

Commenting on the general inclination to stray from US government-related debt, NEPC Chief Investment Officer Erik Knutzen told aiCIO: “Such a move can reflect the view that the risk-reward for US government securities has changed over the last couple years. Rates have gone higher and will continue to go higher, and the potential of inflationary pressures on rates could translate to higher interest rates and higher growth in other parts of the world, such as emerging markets. So reducing government debt at this time is consistent with overall themes within the economic market environment.”

The announcement by Gross came just before US bond yields rose last month to their highest level in almost a year, and reflects his earlier comments in which he criticized US deficit spending and the quantitative easing measures used by the Federal Reserve and other central banks. Gross had voiced concern over the Fed’s low interest rates, which he claimed were “robbing” savers and long-term asset managers.

“It’s not a question of dissing the United States or questioning the credit of the United States, but simply a maturity reflection,” Gross told CNBC earlier this month. According to PIMCO’s leader, US government debt is “mispriced relative to the inflationary environment and the growth we see ahead and there are better alternatives in order to capture yield.” Describing where the capital would flow once it leaves US debt, Gross suggested that the beneficiary would be “… corporate bonds, those would be a smattering of high yield bonds and a growing proportion of emerging market debt which yields in the 5 to 6 percent category. Are these bonds as safe as Treasurys? No, they are not triple-A types of investments but they’re not overvalued based on quantitative easing procedures that we’ve seen over the past 12 months.”

As of January, 2011, the fund’s total domestic government bond holding accounted for 12% of its total assets. Yields on government debt are too low to sustain demand, the well-respected investment leader wrote. This is often attributed to the Federal Reserve’s QE2 program that has seen the purchase of more than $600 billion in government bonds – and many investors fear that when this program ends, bond prices will fall to lower levels.