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. 

WSJ on Divergence Among Emerging Market Economies

I wrote a blog last week on the divergences among emerging markets . WSJ has an article about the subject  today:  I pointed out  the fragile five countries Turkey, Brazil, India, South Africa and Indonesia as having the most potential for underperformance.

From the WSJ:'

The (Bill) Gross Factor in Recent Bond Market Movements ?

I don't need to rehash all the various reports of the departure of "Bond King" Bill Gross from PIMCO.

What I do find interesting is trying to find the footprints of the impact of his departure on the bond market. The Pimco Total Return Fund has been losing billions of dollars in assets. When a mutual fund gets redemptions it must sell bonds to meet those redemption calls.



An article at marketwatch,com noted:

... the corporate bond market is obviously less liquid than the market for U.S. government debt, which makes selling corporate bonds a bit tougher. That means the prospect of Pimco being forced to sell holdings could continue to have a bigger impact on corporate debt than in other markets.

Why would Pimco sell? If investors are pulling massive amounts of money out of the company’s funds, Pimco will need to sell its holdings in order to meet those redemptions. Around $10 billion had been yanked out of Pimco in the immediate wake of Gross’s departure, The Wall Street Journal reported.

Unsurprisingly, traders and other investors are poised to take advantage of what may amount to a fire sale.

“If I’m an investor or a mutual fund or another asset manager, I think the smart move to make is to keep some cash on the sidelines, wait for the Total Return fund to face some more redemptions, than prepare to buy some of the bonds that they’re selling,” LeBas said.

In the near term, that could mean more downside for corporate bonds, wrote David Sekera, director of corporate bond strategy at Morningstar.

Two areas of the bond market that can be even less liquid than investment grade corporate bonds and US Treasury bonds are High Yield (junk) bonds and Treasury Inflation Protected (TIP) bonds.

Exchange traded funds (ETFs) are often used in the bond market by large speculators or fund managers as a means of taking positions in the bond market or hedging. A bond fund manager anticipating the need to sell bonds might first sell the relevant ETF short before liquidating the actual bonds that the fund owns. Similarly a quick way for a hedge fund or other short term trader to take a position anticipating a fall in a sector of the bond market would go short the ETF rather than shorting individual bonds.

I have no information about what PIMCO might have been doing in its bond market activity or whether hedge funds or other traders might have taken speculative positions to take advantage of anticipated bond sales by PIMCO. But I did notice some extremely large volume and large price swings in high yield and inflation protected bond ETFs. over the past week. The Gross factor in the bond market...quite possibly.

Below are 3 examples (there are similar patterns in other ETFs in these sectors of the bond market) all of these ETFs have had huge spikes in volume relative to their average and large price swings.

Addendum (october 2)

WSJ reports:
Investors withdrew a net $23.5 billion from Pimco's Total Return fund during the month, and Pimco said Wednesday that the lion's share took place Friday((September 26). That was the day Mr. Gross stunned the fund world with the announcement that he was leaving as chief investment officer and manager of the Total Return fund, which had $222 billion in assets at the end of August, to join a smaller rival, Janus Capital Group.

TIP Inflation Protected Bond ETF (average daily volume 578.833)

Date	Open	High	Low	Close	Volume	Adj Close
9/29/2014	112.27	112.34	112.14	112.19	3,329,800.00	112.19
9/26/2014	112.4	112.4	112.06	112.11	338,900.00	112.11
9/25/2014	112.5	112.72	112.45	112.69	672,800.00	112.69
9/24/2014	112.42	112.54	112.19	112.28	927,000.00	112.28
9/23/2014	112.13	112.4	112.1	112.38	571,300.00	112.38
9/22/2014	112.15	112.18	111.86	111.96	1,131,400.00	111.96

HYG High Yield Bond ETF (average daily volume 4,163,690)

Date	Open	High	Low	Close	Volume	Adj Close
9/29/2014	91.04	91.37	90.89	91.36	6,289,400.00	91.36
9/26/2014	91.22	91.73	90.95	91.55	11,842,500.00	91.55
9/25/2014	92.1	92.1	91.5	91.61	7,348,000.00	91.61
9/24/2014	92.5	92.5	92.06	92.24	6,342,700.00	92.24
9/23/2014	92.79	92.92	92.44	92.52	3,573,100.00	92.52
9/22/2014	93.16	93.24	92.91	92.99	4,355,300.00	92.99

SJNK Short Term High Yield Bond ETF (average daily volume 408.795)

Date	Open	High	Low	Close	Volume	Adj Close
9/29/2014	29.87	29.88	29.8	29.83	1,386,500.00	29.83
9/26/2014	29.95	29.99	29.84	29.96	3,984,200.00	29.96
9/25/2014	30.05	30.06	29.95	29.98	1,918,100.00	29.98
9/24/2014	30.12	30.12	30.05	30.08	1,155,500.00	30.08
9/23/2014	30.17	30.21	30.11	30.11	812,900.00	30.11
9/22/2014	30.23	30.25	30.17	30.22	3,033,000.00	30.22

Does It Even Make Sense to Speak About Emerging Markets As an "Asset Class"

I certainly think it is important to be invested globally and certainly in parts of the world that are considered "emerging markets".

But within the category there are important distinctions: simply investing in an emerging markets overall index like IEMG is far different than being selective among emerging markets.

For example here is the country allocation in IEMG

as of 19-Sep-2014

	China	17.55%
	Korea (South)	15.01%
	Taiwan	12.82%
	Brazil	10.06%
	South Africa	7.39%
	India	6.88%
	Mexico	4.7%
	Russian Federation	4.07%
	Malaysia	3.88%
	Indonesia	2.73%
	Thailand	2.54%
	Hong Kong	1.71%

Many analysts have written about the fragile five" countries  most exposed to impact of higher US interest rates because of their high dependent on outside investments and their current account deficits. The fragile 5 are Turkey, Brazil, India, South Africa and Indonesia. As can be seen above these make up a bit under 30% of the above ETF. Additionally Russia carries a high degree of political risk.

Another term which is now recognized as having little usefulness is BRIC (Brazil,Russia, India and China) clearly those economies actually have little in common nor do they share many factors that would impact stock prices. They can be purchased in an ETF BRK.

Then there is the major regional division. Eastern Europe, Latin America and Emerging Asia.

The Emerging  Eastern Europe ETF (ESR) is 65% allocated to Russia and 25% to Poland. Obviously it has high exposure to the political risks associated with investing in Russia. And 25% of the asset allocation is in two Russian oil companies Gazprom and Lukoh..in other words not a very diversified portfolio.

Emerging Latin America (EEML) is also very concentrated in country allocation: 56% to Brazil and 26% to Mexico.

The third major country sector within emerging markets is emerging Asia. Below are the country weightings for GMF and Emerging Asia ETF.

Fund Country Weights

As of 09/22/2014

China	38.66%
Taiwan	24.12%
India	17.06%
Malaysia	6.45%
Indonesia	4.89%
Thailand	4.41%
Philippines	3.02%
Hong Kong	0.81%
United States	0.36%
Singapore	0.22%

With the large divergence in the factors impacting the holdings in the above ETFs it shouldnt be surprsing that they have increasingly had large differences in perfomance. Additionally investors might note that emerging markets do still have many billions of dollars that allocate with emerging markets as an asset class. That could lead potentially for opportunities for those looking to invest in particular geographic sectors either to buy or sell in rebalancing during periods where large money flows into or out of emerging markets as a group moving them all in tandem despite the large differences.

Below are 1 one year and 5 year charts for the ETFs mentioned above the line charts show growth of $100,000 the bar charts performance (top) and volatility below that. Color codes are the same on all graphs.

Interestingly over the one year period GMF produced the highest returns at the lowest volatility. Over the 5 year period GMF returned 40% with a volatility of 20.9 a far better risk reward tradeoff than iemg which had a higher  volatility than  iemg  (20.9 vs 15.6) but its return over the period was 40.4% vs 10% a very attractive return vs risk .

1 Year

One Year Returns (top) and Volatility (below)

One Year Growth of $100,00

Five Year

Returns (top) Volatility (bottom)

Growth of $100,00

Morningstar On Performance Chasing In Emerging Markets Investing

An interesting Morningstar video illustrating the performance chasing of investors in and out of emerging markets..with the predictable poor results. Here is the graph under discussion

I am not affiliated with this website...

,,,,called Sensible Investingtv. ,,but their investing approach is quite similar to mine and the website consists of videos so it's likely a bit more digestible than my blog.. It's worth a visit.

Highly recommended.

Bloomberg on Hedging Currency Risk in European Stocks

Bloomberg.com personal finance blog  had this to say today about HEDJ the currency hedged European stock ETF I discussed yesterday

Easing Up in Europe

The European Central Bank recently announced interest rate cuts and a program to buy asset-backed securities and covered bonds. If that sounds familiar, that's because it's reminiscent of the Federal Reserve's actions in the U.S. and also of "Abenomics," the strategy Prime Minister Shinzo Abe has taken to revive Japan's economy. It's yet another central bank printing money to weaken its currency and stimulate exports and its economy.

That puts the WisdomTree Europe Hedged Equity Fund (HEDJ) in the catbird seat. It tracks the top exporting companies in euro zone countries and hedges against moves in the relative value of the euro against the U.S. dollar. That combination gives investors pure exposure to the performance of local stocks, with a bit less volatility from currency fluctuations. So far this year, the fund is up 5 percent, while the non-hedged European ETFs are flat.

HEDJ follows in the footsteps of another WisdomTree ETF, the Japan Hedged Equity Fund (DXJ). That ETF soaked up $10 billion in new cash from investors as Abenomics unfolded in Japan. About $1.8 billion has flowed into HEDJ so far this year, the most of any European ETF. That quadrupled its size to $2.5 billion. HEDJ charges 0.58 percent of assets a year.