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Wednesday, October 1, 2014

About That Pimco Total Return Fund and Investing With the "Bond King"

I wrote about several years ago..I went back and checked the last time and it was June of 2010.

At the time (see below) I argued  that investing in a "go anywhere" bond fund is not a good idea as the core of one's bond holding. A bond allocation should be set according to one's view of the proper distribution among maturity and types of credit risk (govt, investment grade and high yield) and for some international...although I am not a fan of international (non US) bonds. This can be easily done with full transparency through a mix of bond ETFs. In fact one approach although not one I favor is simply to buy a total US bond market ETF like AGG or a fund like the Vanguard Total Bond Index.

 Investing in a go anywhere bond fund is simply investing with a "genius" akin to giving money to a hedge fund manager and in fact at times Pimco Total Retund Bond Fund derivatives, emerging market bonds, bank loans preferred stock along with more traditional holdings like US Treasury As the FT reported:

Total Return is spread across the fixed income universe and many of its holdings are huge in proportion to the markets in which it trades. Close to 10 per cent of it, as of March, was in Spanish and Italian government debt, and it has a big position in the relatively illiquid index-linked Tips market. Further, because of its size, it has had to make many bets via derivatives, taking on exposure to Indonesian or Chinese credits using credit default swaps. The section on derivative positions in its latest annual report runs to 26 pages.

I am not much of a believer that there are market "geniuses' and if there are the streak is bound to end and even if one believes in such geniuses such an investment should be a small part of ones portfolio not a core holding.

So perhaps the question investors who have held Pimco Total Return Fund particularly if it is a major part of their bond allocation are asking the wrong question. It seems many are trying to decide whether it is time to stay with PIMCO, move to Janus and follow Bill Gross or search for the new "bond king". In fact the WSJ has a 6 minute video on this subject .if you google that topic you will get at least a half dozen similar articles.

Perhaps the better question investors should be asking is if this isn't a good opportunity to replace that "go anywhere bond fund" with bond ETF(s) or index fund(s)

There are No Geniuses ....Bond Market Division

I have written before about the largest actively managed bond mutual fund in the world: Pimco Total Return. Although the firm and many analysts categorize it as a "core" bond holding I argue that since it can literally move anywhere in the realm of fixed income it is more of a bet in its manager "bond guru" Bill Gross. The investor in the fund never really knows what Pimco Total Return is holding and the market view and hence allocation of the manager can change radically. While Mr. Gross may indeed be a very bright man a core bond holding, as I have argued before, should consist of an etf or index fund where when knows exactly the maturity and credit quality of the holdings at all time.

I certainly had no advance knowledgeof what would happen to Mr. Gross and his fund.

But I do certainly hold to the view that "go anywhere" bond funds are not a good idea for investors...certainly not as a significant part of their bond allocation.

A bond allocation should be the anchor of relative stability for a portfolio and should be transparent. 

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