PIMCO, DoubleLine, TCW big winners from Fed’s QE3 assault

NEW YORK, Thu Sep 20, 2012 – The Federal Reserve’s move to stimulate the economy by buying mortgage securities is proving to be manna from heaven for three of the biggest players in the bond fund business: Pacific Investment Management Company, DoubleLine Capital and TCW.

The three investment firms all manage mutual funds that loaded up on mortgage-backed securities well before the Fed announced last Thursday that it would start buying $40 billion in government-backed mortgage debt each month until there’s a sharp improvement in the job market.

With U.S. Treasury yields at extraordinary low levels, bond investors like TCW, PIMCO and DoubleLine have migrated toward mortgage-backed securities as those securities not only provide higher yields but they perform well when interest rates are stable.

It is TCW’s flagship fund that is outperforming the ones managed by PIMCO co-founder Bill Gross and DoubleLine founder Jeffrey Gundlach – the two money managers seen as the reigning kings of the bond investing world.

The $7.4 billion TCW Total Return Bond Fund, which has more than 80 percent of its assets invested in mortgage-backed securities, is up 10.68 percent for the year.

The TCW fund is besting the 8.61 percent year-to-date return for the $272.5 billion PIMCO Total Return Fund – the world’s biggest bond fund – and the 7.89 percent return posted by the $32 billion DoubleLine Total Return Bond Fund.

PIMCO’s Gross spotlights crumbling credit in September outlook

NEW YORK, Wed Sep 5, 2012 – Bill Gross, founder and co-chief investment officer of bond giant PIMCO, said in his September investment outlook that low returns for banks and other lenders will lead to reduced lending and a scaling back of operations in coming years.

Gross, whose Pacific Investment Management Co had $1.82 trillion in assets as of June 30, wrote that weak returns for banks and the “overleveraged” condition of borrowers has brought the global economy to a tipping point.

For some time now, Gross has been sounding a somber note about the economy and prospects for economic growth. In his last investor letter, he talked about the death of equities and the prospect for mediocre returns for both bonds and stocks.

“When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over,” Gross wrote.

Gross wrote that credit “is what makes the global economy go” and that financial institutions such as banks, insurance companies, and investment firms will lose their incentive to lend at low rates and cut back on lending and enact more austere measures.

“In the process, (financial institutions) lay off, instead of hire new workers; close branch offices or even ATM machines by the thousands as did Bank of America recently; and yes, ultimately reduce the rate of lending or credit growth which propelled the global economy so effortlessly over the past century,” Gross wrote.

The U.S. Federal Reserve and other central banks may be “to blame” for the “current shipwreck,” wrote Gross, and their plans to inject liquidity into the financial system have backfired.

Gross, who runs the world’s largest bond fund, the PIMCO Total Return Fund, which has $272.5 billion in assets as of Aug. 31 and attracted about $1.29 billion in inflows last month, according to Morningstar.

Gross wrote that reduced lending habits and a new “age of inflation” will lead to weaker returns on both stocks and bonds, which was the main point in his August letter.

PIMCO’s Gross prophesies death of equities in August outlook

NEW YORK, Tue Jul 31, 2012 – Bill Gross, the co-founder and co-chief investment officer of bond giant PIMCO, says it is time to write the obituary for stock investing as we know it.
Writing in his August investment letter, the manager of the world’s largest bond mutual fund said lower returns on stocks – and bonds, for that matter – means individuals will have to work longer to save for their retirements.
“If financial assets no longer work for you at a rate far and above the rate of true wealth creation, then you must work longer for your money,” Gross wrote.
Gross, whose Pacific Investment Management Co has $1.82 trillion in assets, took particular issue with the noted economist Jeremy Siegel, who popularized the notion that a portfolio of stocks can return on average 6.6 percent over the long haul.
“The Siegel constant of 6.6 percent real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned,” he said.
Gross’ August investment letter is a bit reminiscent of BusinessWeek’s famous “Death of Equities” cover story, which appeared in 1979, just before the start of a big bull market.
Gross, whose firm launched its first actively-managed equity mutual fund in 2010 and has former Troubled Asset Relief Program leader Neel Kashkari as its head of global equities, said bonds are no salvation either.

PIMCO’s Gross cautions against inflation and credit ‘ocean’

NEW YORK, Tue May 1, 2012 – Central bank policies will induce growth in developed countries this year but will create inflationary risks down the road, Bill Gross, founder and co-chief investment officer of PIMCO, said in his regular monthly letter to investors.

In the outlook, entitled “Tuesday Never Comes,” Gross highlighted how stimulative central bank policies have created an “ocean” of credit and said that the credit acceleration will produce economic growth this year for developed countries while also creating structural risks and rising inflation.

Specifically, commenting on the Federal Reserve, Gross said central bankers in the United States appear to believe that markets will buy future Treasuries at low yields “because the private market’s ‘stock’ of Treasuries has been depleted.”

Overall, Gross’ investment outlook was little changed from prior monthly investor letters or comments he has made on numerous recent television appearances.

He reiterated that investors should target bonds “in the five-year range” and stocks that pay dividends around three to four percent. He also recommends real assets and commodities.

“In 2008, central bankers never really knew how much debt was out there, and to be honest, they don’t know now,” Gross said.

He likened the efforts of the Fed to stimulate demand for Treasuries to wine drinkers, who have been sipping “rare vintages,” and now the cellar is almost empty. The Fed’s hope, Gross said, is that other “wine lovers will now be forced to restock their cellars to get a historically comfortable inventory.”

But the manager of the world’s largest bond fund, the PIMCO Total Return Fund, said he personally favors beer to wine.

Gross’s bond fund bleeds $1.4 billion in December: Morningstar

NEW YORK ― The PIMCO Total Return Fund, the world’s largest bond fund, had $1.4 billion in outflows in December, according to fund analytics firm Morningstar.

The fund, operated by Bill Gross, co-chief investment officer of Pacific Investment Management Co, suffered total redemptions of $5 billion in 2011, a year in which the fund underperformed benchmarks after betting heavily against U.S. Treasuries, which rallied on the year.

The fund, which has about $244 billion in assets under management, has had investor redemptions on and off for more than a year. Morningstar estimates total redemptions have exceeded $13 billion since November 2010.

Still, December was kinder to Gross than the previous year. In December 2010, Morningstar estimates investors withdrew $6.7 billion from the fund, PIMCO’s flagship.

A spokesman for PIMCO, which is based in Newport Beach, California, and oversees more than $1.35 trillion in assets, was not immediately available to comment.

Last year was a humbling one for Gross. His bad call on Treasuries led him to issue an unusual “mea culpa” letter to his investors.

U.S. Treasuries were the best-performing bond class in 2011 by a wide margin. The benchmark 10-year Treasuries returned nearly 17 percent in 2011, the largest gain for the U.S. bonds since 2008.

Meanwhile, other intermediate-term bond funds reported taking in new money in 2011, according to Morningstar. The JPMorgan Core Bond Fund took in $2.6 billion in new money and now has $23 billion in assets. The Metropolitan West Total Return Fund took in $5.3 billion in new money and now manages over $17 billion.

The fastest-growing bond fund in the space, according to Morningstar, is the DoubleLine Total Return Fund. It saw $10.6 billion in new money and now has over $15 billion in assets. Overall, DoubleLine manages about $22 billion.

Gross is moving to reclaim his past success by ramping up his purchase of mortgage-backed securities. The self-styled “bond king,” analysts say, is betting on the likelihood the Federal Reserve will also purchase those securities in a bid to boost the U.S. housing market.

Bond giant PIMCO closing in on first bank acquisition

NEW YORK ― A $2.3 billion investment fund managed by bond giant Pacific Investment Management Co. that is largely targeting distressed U.S. banks is trying to get regulatory approval for one of its first major transactions — a deal involving a North Carolina community bank.

The Federal Reserve Bank of Richmond is reviewing an application for a company set-up by the year-old PIMCO Bravo Fund to acquire an ownership stake of roughly 20 percent in ECB Bancorp Inc.

The PIMCO fund is making a $25 million investment in the parent company of The East Carolina Bank as part of a $79.7 million recapitalization of the Engelhard, N.C.-based lender. The PIMCO Bravo fund is the single largest investor in the deal announced in June by the bank, which has 25 branches and about $945 million in deposits.

“I have always described this as partnership,” A. Dwight Utz, ECB Bancorp’s president and chief executive officer, said about the deal with PIMCO and five other investment firms.

In dollars, the transaction is small, but it appears to be the first investment in a bank by the PIMCO Bravo fund, which has aggressively raised money from retail investors for over a year.

PIMCO, home to the world’s largest bond fund and managed by its highly-visible founder, Bill Gross, was recently granted full control of its various investment products by its parent company, Allianz SE — a move that gives the Newport Beach, Calif. firm more independence to expand into new businesses.

This latest move, which follows PIMCO’s major push into equities, could make Warren Buffett-style profits by purchasing stakes in distressed and undervalued U.S. banks still struggling to get by in the wake of the financial crisis.

In July, PIMCO sought to raise $600 million for real estate investment trust PIMCO REIT Inc, which plans to invest in residential mortgages and provide an alternative to government-sponsored enterprises Fannie Mae and Freddie Mac.The PIMCO Bravo fund, which is short for Bank Recapitalization and Value Opportunities, also plans to invest in other bank assets, such as problem loans.

The PIMCO Bravo fund is opening for business at the same time the Federal Deposit Insurance Corporation reported there were still 865 banks in the United States at risk of failing at the end of the second quarter.

Pimco chief El-Erian gives ‘low probability’ of QE3 stimulus

NEW YORK ― Pimco chief Mohamed El-Erian on Thursday put low odds on a third round of U.S. monetary stimulus unless there is a “major further deterioration” in the U.S. economic outlook.

“We would assign a low probability (at) this stage to QE3 given the general recognition that the forward-looking cost-benefit analysis has shifted away from the potential benefits and toward greater costs and risk,” El-Erian, co-chief investment officer of Pimco, said in a live blogging question and answer session on Reuters.com.

“Therefore, it would take a major further deterioration in the economic outlook, combined with a willingness by the Fed to take greater reputational and political risks,” he said.

Pimco, which manages $1.2 trillion in assets, is home to the world’s largest bond fund.

El-Erian’s outlook follows the June 22 forecast of fellow Pimco Co-Chief Investment Officer Bill Gross that the Federal Reserve would hint at a third round of bond purchases, or QE3, at the Jackson Hole meeting in August.

Also on June 22, the U.S. Federal Reserve cut its forecast range for U.S. economic growth to 2.7-2.9 percent from 3.1-3.3 percent. It offered no hint it would offer further monetary support via quantitative easing.

At the end of June its quantitative easing program, which consisted of purchasing $600 billion worth of U.S. debt, also known as QE2, expired.

The row in Washington over the United States’ debt ceiling and a potential downgrade to its AAA credit rating has drawn global attention to the health of the economy and whether it needs more government help.

The three major credit rating agencies have all put the U.S. government on warning that it faces a downgrade if debt payments are missed come August 2, when the U.S. Treasury says it will have exhausted its financial resources.

The U.S. Congress has the authority to raise the country’s borrowing limit.

El-Erian said a cut to the U.S. credit rating would be disruptive to a “global economy that is constructed with the U.S. at its core. Or to be even more blunt, the U.S. is the core of the core.”

If the rating were cut, global financial markets would become more volatile with the risk of major re-allocations of capital both within and across borders, El-Erian said.