Wednesday, January 14, 2009

Smart money is on bailout winners

(NEW YORK) THE collapse of the US housing market helped Bill Gross outperform 99 per cent of his fund-manager peers over the past five years. Now he's betting on securities that may benefit from rescue efforts in Washington.

The 64-year-old co-chief investment officer at Pacific Investment Management Co is urging investors to anticipate which assets will benefit as the government struggles to boost the economy. Last week he recommended municipal bonds, inflation-protected Treasuries and debt the US government plans to buy. In the past six months, Mr Gross bought senior bank debt, agency mortgage securities and preferred shares in financial companies, all before the government did the same.

Mr Gross, who keeps the attention of investors through a combination of performance, monthly commentaries and television appearances, navigated through the worst credit crisis since the Great Depression, said Lawrence Jones, a senior mutual fund analyst with Morningstar Inc. Mr Gross's US$128 billion Total Return Fund, the world's largest bond fund, returned an average 5.4 per cent annually over the past five years, in part by avoiding riskier debt and asset-backed securities as early as 2005.

'If you are beating the competition, some people will idolise you,' said Mr Jones, who is based in Chicago. 'And some people will hate you and envy you. That's a natural thing.' Morningstar named Mr Gross manager of the year three times, including for 2007.

Newport Beach, California-based Pimco's Total Return Fund rose 4.8 per cent in 2008, while corporate and government bond funds tracked by Morningstar declined an average 8.1 per cent, according to data compiled by Bloomberg. The US$128 billion fund's five-year return was better than 99 per cent of its peers.

Mr Gross, a yoga enthusiast, credits a brainstorm that emerged while meditating with helping him steer clear of the credit market debacle that sent returns on high-risk, high-yield bonds down 26 per cent in 2008. Mr Gross wasn't available for comment, Pimco spokesman Mark Porterfield wrote in an e-mail.

Now, Mr Gross says debt sold by cities and states and some investment-grade companies is attractive. In early 2008, he started buying securities of New York-based JPMorgan Chase & Co and Charlotte, North Carolina-based Bank of America Corp, viewing them as getting protection from the Federal Reserve.

'It was a bold move,' Mr Jones said. 'Now we're seeing a rebound in various risky assets. Pimco is placing its bets by sticking to companies at the top of the economy's capital structure.' Mr Gross had his share of misses in the past year. Pimco held Lehman Brothers Holdings Inc bonds in at least 12 of its funds, including the Total Return Fund, and Mr Gross was buying the debt as recently as June 2008, data compiled by Bloomberg show. Lehman filed the world's biggest bankruptcy in September.

He started loading up on high-quality mortgage-backed securities guaranteed by Freddie Mac and Fannie Mae in 2008, while easing on Treasuries. Last year was the best for US government debt since 1995, with a 14 per cent gain, while municipal bonds lost 3.95 per cent and Treasury Inflation- Protected Securities, or Tips, lost 1.13 per cent, according to data compiled by Merrill Lynch & Co.

Mr Gross's decision to back out of a US$38 billion bond swap for GMAC LLC debt last year also helped drive his performance. The debt soared as much as 83 per cent to 80.5 cents on the US dollar after the auto financing company won approval to become a federally backed bank. Other holders participating in the exchange accepted as little as 60 cents on the dollar.

Pimco's prominence provides Mr Gross with opportunities that aren't available to all his rivals, said Geoff Bobroff, a mutual fund consultant in East Greenwich, Rhode Island. The firm, a unit of Munich-based Allianz SE, has about US$790 billion in assets under management.

The Total Return Fund has 81 per cent of its assets in mortgage-related securities and 16 per cent in investment-grade corporate debt, two of the fund's biggest positions as at Nov 30, according to information posted on the company's website.

The fund's biggest holding as at September was a 6 per cent Fannie Mae mortgage bond, according to data compiled by Bloomberg. 'A lot of his comments can be viewed as self-serving,' Mr Bobroff said. 'That's the problem of a manager who is so visible in the marketplace. Is he touting current advice or is he touting what he's already done?'

'Pimco's view is simple: shake hands with the government,' Mr Gross wrote in his commentary this month. 'Make them your partner by acknowledging that their chequebook represents the largest and most potent source of buying power in 2009 and beyond.'

Mr Gross, born in 1944 in the Ohio steel-company town of Middletown, graduated from Duke University with a psychology degree in 1966. He spent three years in the Navy and served in Vietnam.

Mr Gross joined Pimco after earning a master of business administration degree from the University of California in Los Angeles in 1971. He began using yoga more than a decade ago and credits his meditation sessions with clearing his head and helping him absorb unexpected news, such as a Fed half-point interest rate cut in January 2001. -- Bloomberg

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