The love affair with the “Bond King” Bill Gross appears to
be back in full effect. Perhaps it has
to do with all of the excitement surrounding the launch of the managed PIMCO
Total Return ETF (BOND) back on February 29, 2012. On the other hand it could have to do with
the fact that the PIMCO Total Return fund is once again outperforming its
peers. Either way, the 2011 Gross
critics seem to have disappeared.
The silencing of the critics is not a major surprise to
me. In December of last year I wrote a
piece titled “Premature To Dance On The Gross Grave”, which can be read here http://bit.ly/HF3InH . Again, no matter what field we are talking
about, people seem to enjoy jumping on someone who has achieved a high level of
success when they stumble. I understand
columnist have to come up with material.
I also understand when it comes to missteps Gross has not exactly
provided many opportunities to jump on over the years. Maybe that is the true sign of his
greatness. As of the close on May 16,
2012 Gross’ PIMCO Total Return Fund has
once again re-established itself as a top performer. Here is the performance data as of January 1,
2000:
|
PTTDX
|
US Agg Bond
|
|
|
YTD
|
4.56%
|
1.86%
|
|
1 YR
|
5.64%
|
6.96%
|
|
3 YR Avg Ann
|
8.56%
|
6.90%
|
|
5 YR Avg Ann
|
8.55%
|
6.53%
|
|
10 YR Avg Ann
|
6.70%
|
5.79%
|
|
Avg Ann
|
7.28%
|
6.43%
|
|
Since 1-1-2000
|
Obviously the returns for bonds have been stellar the last
decade. This has led to many economists
warning against the future possibility of a correction in long-term bonds. With rates sitting at 0% and nowhere else to
go but higher in the future, it is not hard to understand their concern. I wrote about this as well back in March with
a piece called “Chasing Yield? Buyer
Beware!”, which can be read here http://bit.ly/vZWOAp
. My short-term concern is the hype that
has surrounded the newly launched PIMCO Total Return ETF (BOND). All the enthusiasm surrounding BOND has
pushed the price of the ETF well ahead of the managed funds NAV. For example, since March 1st the
managed mutual fund is up 1.87%. Yet
BOND is up 4.64%. Being that the ETF
holdings mirror the holdings of the managed PIMCO Total Return Fund I would
pause before buying BOND at this point.
I feel that placing a buy today would be the equivalent of paying a
2.72% sales charge to buy the ETF considering it is trading at a premium to Net
Asset Value (NAV).
Gross has earned his stellar reputation. However, the launch of BOND is another
classic example of the difference between ETFs and managed mutual funds. As ETFs are bought and sold like stocks, this
leads to them either getting ahead of themselves or unfairly falling behind
based upon the headlines of the day. Right now investors are chasing a legend, and
as a result have sent shares of BOND higher; higher than what Gross has
actually been able to achieve with the holdings. The same will be seen someday when investors
react to negative headlines. I
guarantee you if BOND had been trading last summer that the ETF would have
performed at lower rate than the managed fund.
With every financial publication jumping all over Gross’ miscalculation
to bet against treasuries, you would have seen investors reacting by
selling shares of the ETF. Yet the
holdings of the mutual fund would not have been affected by the news.
Every investor has a different appetite. I own both the managed mutual fund and the
ETF, because I manage mutual fund models and ETF models. However, I feel it is important for investors
to know that at this point in time, if you are considering a purchase of BOND
shares, that you know you are paying approximately 2.72% more than what the
actual holdings are worth.
Thank you and good luck everyone!
Jon R. Orcutt, founder
of Allocation For Life, is an asset allocation strategist and author of “Master
the Markets with Mutual Funds: A Common Sense Guide To Investing Success”
