New York. Some of the biggest names in the investment world have been whipsawed by the recent rise in global yields and the strength in the euro against the dollar, with investors bracing for more sharp moves later this year stemming from central bank actions.
Pimco’s flagship Total Return Fund, which lost its crown as the biggest bond fund in the world in April, had been lagging its peer intermediate-term category and benchmark after going long German bunds and shorting euros against the dollar in recent months.
Even bond veterans Dan Fuss of Loomis Sayles and Bill Gross of Janus Capital Group have run into a few snafus by their fixed-income and currency trades.
“The market is more volatile,” Fuss, 81, said in a telephone interview. “We don’t react or change strategies by the day — today, tomorrow or next week. Our focus on the bonds and currency markets are much, much longer.”
Top money managers and investment strategists have been warning the US Federal Reserve was preparing markets for an interest-rate hiking cycle and that other central banks were embarking on loose policies that would trigger volatility. And yet, when rates rose at their fastest since the “taper tantrum” in 2013, many of those managers got caught flat-footed.
Fuss said his Loomis Sayles Bond Fund is lagging its peer multisector bond category and benchmark because 28 percent of the fund is in non-US dollar assets.
“We don’t have any kind of shorts, leverage or derivatives in our fund,” Fuss said. “It’s currency exposure that contributed to our performance, positively in most years but negatively over the last 11 months. It has also provided higher income for comparable quality.”
The Loomis Sayles Bond Fund, with $23.7 billion under management, is down 0.20 percent so far this year, underperforming its peer category by 2.10 percentage points and trailing 98 percent of its multisector group, according to Morningstar data.
Not every well-established bond manager is having a bad year.
In the multisector bond category, the $2.6 billion Pimco Diversified Income Fund, overseen by Pimco Group CIO Dan Ivascyn, is outperforming 97 percent of its peer category. The fund is posting returns of 4.88 percent and outperforming its category by 2.98 percentage points.
The $68.3 billion Templeton Global Bond Fund, run by Michael Hasenstab, has returned 1.38 percent while its world bond peer category is down 1.43 percent so far this year. On a 12-month basis, the Templeton fund is returning 0.34 percent, surpassing 74 percent of its peer category, according to Morningstar data as of May 26.
Pimco Total Return
The Pimco Total Return Fund, run by Scott Mather, Mark Kiesel and Mihir Worah, has rebounded in the last several days with the decline in the euro, posting returns of 1.19 percent year-to-date, beating 72 percent of its peers. But its one-month return is down 1.12 percent and three-month return is down 0.42, lagging 82 percent of the Pimco Total Return’s peer category, Morningstar said as of May 26.
Pimco, which used currency positions under Gross, its former chief investment officer, declined to comment for this story. On a 12-month basis ended May 26, the Pimco Total Return Fund, which has $110 billion in assets under management, has posted a return of 2.58 percent, lagging 53 percent of its peer category.
“For Pimco’s Total Return Fund it isn’t unusual, but I don’t think the average bond investor thinks they’re taking these kind of risks when allocating to an intermediate-term bond fund,” said David Schawel, vice president and portfolio manager of Square 1 Financial. “This type of exposure might even be prudent on a tactical basis, but the bigger question is whether investors understand what they’re investing in.”
Tad Rivelle’s Metropolitan West Total Return Bond fund, which has had net inflows as a result of Gross’s sudden exit, is posting returns of 0.78 percent so far this year, trailing 66 percent of its intermediate-term peer group. The MetWest Fund families are overseen by Los Angeles-based TCW.
“Given the dynamics in the current environment and our concerns around valuation in fixed-income, we’ve adopted essentially a risk-off portfolio construction,” a TCW spokesman said. The MetWest bond fund has returned 3.12 percent over the past 12 months, better than 74 percent of its intermediate-term bond peers.
For his part, Gross’s $1.5 billion Janus Global Unconstrained Fund is down 0.40 percent so far this year, underperforming its peer category by 1.88 percentage points and lagging 93 percent of its non-traditional bond category, according to Morningstar data.
“My famous (infamous?) ‘Short of a lifetime’ trade on the German Bund market was well timed but not necessarily well executed,” Gross said in his June Investment Outlook on Wednesday.
Gross, 71, had previously said in a tweet on April 21 that German 10-year Bunds were “the short of a lifetime” and better than the bet against the pound in 1992 by investors George Soros and Stanley Druckenmiller.
“When I put out the word that I thought German Bunds were the greatest short in the world, I basically hadn’t done much but I thought it was a great idea, and I came on TV and said that,” Gross said on CNBC on Wednesday. “It seems that the market believed me and moved ahead of me.”
German 10-year Bund yields have hit fresh record lows since the European Central Bank began purchases of public-sector bonds on March 9 as part of its trillion-euro stimulus program, with the latest low of 0.049 percent touched on April 17. The yield on the 10-year Bund has risen to 0.54 percent on Wednesday.
For the non-traditional bond category in which Gross is lagging, Jeffrey Gundlach of DoubleLine Capital has seen his $140 million DoubleLine Flexible Income Fund outperform rivals. The DoubleLine Flex fund is posting returns of 2.88 percent so far this year, outperforming 87 percent of its peers, and 4.38 percent on a 12-month basis, better than 94 percent.
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