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Pimco's Bill Gross (© Jason Reed / Reuters/Jason Reed/Reuters)
Pimco's Bill Gross (© Jason Reed / Reuters/Jason Reed/Reuters)

Bill Gross: This year is a stinker Add to ...

Bill Gross of Pacific Investment Management Co. (better known by its acronym, PIMCO) has made more than a few headlines this year for his critical views on central bank policy and his bearish views on U.S. government bonds. Now, add this to the list: The man who leads the biggest bond fund has devoted his October newsletter to his poor performance. That’s right, the world’s most famous bond guru has issued an extremely rare mea culpa.

“My fabulous rock of a wife, Sue, always tells me that by December 31st, the alpha is always green, not red, but this year will be a long shot,” he said in his letter (via DealBreaker). “This year is a stinker. PIMCO’s centerfielder has lost a few fly balls in the sun.”

According to the Wall Street Journal, his flagship PIMCO Total Return fund is on track to post an annual gain of just 1.1 per cent this year, versus 5.7 per cent for the benchmark Barclays Capital U.S. Aggregate Bond Index. Put another way, the fund has been outperformed by 90 per cent of rival funds, and new money flowing into the fund -- as much as $58-billion in 2009 -- has slowed to a trickle.

He attributes the performance setback to a flight to quality, which sent investors scrambling for U.S. government bonds as the European debt crisis heated up. As Mr. Gross puts it, investors were more concerned about the return of their money than the return on their money, and so bid bond prices higher than he had expected.

“My well-advertised aversion to Treasuries was a little overblown in the press – the fund had positions in German Bonds and Canadian Treasuries to counter the U.S. underweight, but not enough,” he said. “As Europe’s crisis and the U.S. debt ceiling debacle turned developed economies towards a potential recession, the Total Return Fund had too little risk off and too much risk on.”

His portfolio had been positioned for real global economic growth of 2 per cent, but has since shifted to an expectation for real growth among developed economies closer to 0 per cent over the next several quarters. So, mea culpas aside, Mr. Gross is expecting better performance ahead should this new, more bearish, forecast prove true. He certainly sounds undaunted.

“We know why PIMCO Total Return is arguably the largest and hopefully the greatest bond fund in the world,” he said. “You want consistency, no surprises, but at the same time you want to get back through outperformance more than you pay for in fees. PIMCO, Mohamed El-Erian, and yours truly are working hard to make that happen.”

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