Last week, the yield on the government's 30-year bond topped 8 percent for the first time in 2 1/2 years, creating more carnage in the battered bond market. But the vicious yearlong bear market may nearly be over, says William Gross, chief strategist for PIMCO, a bond powerhouse.
Interviewed at PIMCO's Newport Beach, Calif., offices, Gross allowed that yields on the bellwether Treasury bond could still move higher -- perhaps hitting 8.25 percent before December 31. But he then expects a fallback to current levels or even a bit lower. His reasoning: "Long-term rates in the vicinity of 8 percent are already attractive enough to start luring money back into bonds at the same time that they start to bite into the pace of economic activity and reduce fears of faster inflation." The slower growth and lessened fears should dampen rates.
Gross advises opportunistic investors to start buying long- term bonds now and not to try to guess when rates will peak: Dollar cost average until the end of the year, then buy fixed quantities of bonds on a regular schedule. For savers, short-term Treasuries offer mouth-watering returns and are risk free if held to maturity. "There's nothing wrong with clipping 6.9 percent coupons on two-year government notes," Gross declares.
The lanky marathoner inspires the kind of awe among bond professionals that Peter Lynch did when he ran Fidelity Magellan. Gross handles $55 billion of fixed-income assets for a blue-chip roster of institutions from corporate pension plans to foreign central-bank portfolios, making him one of the world's leading bond managers.
About $5 billion of assets are in mutual funds. Normal minimums are a daunting $500,000 but can be as low as $1,000 for the popular PIMCO Total Return and Low Duration funds if purchased through Charles Schwab and other discount brokers. These funds, along with the Gross-managed Harbor Bond Fund (minimum $2,000), all get a top, five-star rating from Morningstar, the mutual fund publication.
PIMCO's fixed-income portfolios have generated average annual returns of around 11 percent for 20 years, about 1 1/2 points above the Lehman Brothers index for corporate and government bonds. In the increasingly intimidating bond arena, someone who consistently enhances returns by a single point becomes a legend. And Gross, though a regular winner at blackjack when he was younger, doesn't do it by speculating.
Rather than betting heavily on the course of interest rates, Gross identifies undervalued sectors of the fixed-income market. When mortgage-backed securities came unglued earlier this year, PIMCO upped its holdings, a move that paid off. The PIMCO Low Duration fund, with half of its $2 billion in assets now in mortgage-backed securities, is one of a handful of bond funds not in the red so far this year. It was flat through mid-October. Historically, says Morningstar, this fund has averaged the same yield and total return as longer-term bond funds but "with much less risk."
PIMCO clearly wants individual investors. Last week it took overthe management ofPaineWebber's troubled Short-Term U.S. Government Income fund, which tanked earlier this year because of losses on derivatives. A successful recuperative operation could provide PIMCO with more opportunities to manage other bond portfolios for PaineWebber, which has recently enlarged its family of mutual funds through a merger with Kidder Peabody.
Moreover, PIMCO recently merged with Thomson Advisory Group, which has a mutual-fund family aimed at retail investors. Soon to be renamed PIMCO Advisory L.P., shares have been around $18, nearly double their premerger price. (A $200 million secondary offering is set for this month.) Despite the recent gain, the stock -- still listed on the Big Board as Thomson Advisory Group - - is yielding 10 percent, and 60 percent of that dividend is tax- deferred because of the limited-partnership format. Not bad for shares that also have good appreciation potential. Now investors have a chance to invest not only with Bill Gross but in him.
