Bill Gross had a tough June

bond fund

Famed bond fund manger Bill Gross watched as nearly $10 billion in cash disappeared from his PIMCO funds in June. Investors are leery of interest rate increases creating some big losses for the funds.

Here is some of the context from the Wall Street Journal story:

The outflow came as Mr. Gross’s bond fund handed investors a loss of 3.6% on a total-return basis for the second quarter of the year, the biggest quarterly loss since its inception in 1987, according to data from fund trackers Morningstar and Lipper.

The fund’s performance compares with a negative 2.32% return on its benchmark—the Barclays U.S. Aggregate Bond Index, according to Morningstar.

Morningstar said it estimated Mr. Gross’s fund had a net redemption of $9.6 billion in June. But the fund tracker noted that Pimco had provided Morningstar with a preliminary figure that was a bit bigger, at $9.9 billion.

The New York Times points out that Pimco’s troubles started with the comments indicating that easy money policy:

The size of the outflows underscore the challenges facing Pimco, which has risen to become the fifth-largest money manager in the world as a result of the popularity of its bond mutual funds, and bond mutual funds more broadly.

Since Ben S. Bernanke, the Federal Reserve chairman, indicated in May that the Fed may pull back on its bond-buying programs, investors have moved out of bonds, which has driven up interest rates and pushed down the value of existing bonds.

While Pimco’s Total Return fund has a reputation for outperforming a strong bond market, as the market has dropped, Pimco’s fund has done even worse. In the second quarter, the fund dropped 3.7 percent, worse than 95 percent of similar bond funds tracked by Morningstar. The outflows represent nearly 3.4 percent of the fund’s total assets at the beginning of the June, according to Morningstar, leaving the fund with $268 billion under management.

The rest of the industry is also struggling, according to the Bloomberg story:

Investors withdrew $52.8 billion from bond mutual funds and $8.9 billion from bond exchange-traded funds through June 24, according to TrimTabs Investment Research in Sausalito, California, surpassing the previous monthly record of $41.8 billion set in October 2008.

The 30-year bull market for bonds probably ended in late April as yields reached a low and prices peaked, Gross said in May. “You need to look at an amalgamation of Treasuries, mortgages and corporates, and not just Treasuries,” he said in an e-mailed statement. “Measured on that basis, 4/29/13 has been the price high and yield low, to this point.”

Gross’s fund experienced withdrawals in six of the 12 months in 2011, Morningstar data show, as the star bond manager missed a rally in Treasuries and trailed 70 percent of peers for the year, according to data compiled by Bloomberg.

The fund lost $6.7 billion to redemptions in December 2010, the previous high, Morningstar data show.

According to the Reuters story, Gross has been trying to convince investors to hold the line:

The bond selling continued through much of June after Bernanke repeated his stance at the close of the Fed’s latest policy meeting on June 19 and added that the Fed could end its stimulus altogether by mid-2014.

Some bond managers, including Gross, have been trying to settle investors’ nerves, saying the flight from bonds, which pushed the yield on the benchmark 10-year U.S. Treasury note up 36 basis points to 2.49 percent in June, is overdone. Yields on bonds move inversely to their prices.

Pimco Total Return had 37 percent of its portfolio invested in U.S. Treasury securities at the end of May, its largest position, according to Pimco’s website.

The future of Pimco Total Return depends on whether the fund’s bet on Treasuries rebounds, said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

“The fund is making a bet that has not worked in the last two months, and whether or not it can hold on to assets is going to be tied to whether or not that bet works,” Rosenbluth said.

The high level of redemptions is a black mark for the famed Gross, who is often thought of as the king of bond funds. The WSJ points out his long-term track record remains fairly good:

Even so, Mr. Gross holds a solid long-term track record.

The Pimco Total Return fund has returned 6.75% a year, on average, over the past 15 years, as of Monday, according to Morningstar. That outperformed 5.52% average annualized returns on the Barclays U.S. Aggregate Bond Index.

In 2010, Morningstar named Mr. Gross the best manager of the decade. Newport Beach, Calif.-based Pimco is a unit of Allianz SE.

Mr. Gross last week sought to reassure clients in his monthly newsletter. “Those icy Atlantic money-market waters are likely to be with us for a long, long time,” Mr. Gross wrote. “Have a cocktail, tell the band to stop playing dirges, because you’re gonna be just fine with PIMCO at the helm.”

Since the fund’s inception, the fund has suffered a calendar-year loss in only two years—a 0.28% loss in 1999 and 3.58% loss in 1994, according to Morningstar.

The $4.4 billion PIMCO Total Return Exchange-Traded Fund, the ETF version of Mr. Gross’s bond fund, also suffered a record outflow of investors’ cash in June—$511.5 million, according to Morningstar. That was the biggest monthly outflow since its inception in February 2012.

The ETF still attracted $688 million in new cash during the first half of the year, according to Morningstar. The ETF lost 3.33% in the second quarter and this year through Monday, it has lost 2%, according to Morningstar.

But the losses to bond funds have many investors worried. Many are searching for yield and having to take on more risk to get it. While Gross moves to try and reassure his investors (and keep money in his funds), the market turmoil will likely still continue to wreck havoc on his funds.