PIMCO made the right call on several economic events CIO Bill Gross started having concerns about the housing market and loose lending standards a couple of years ago. He was extremely light on credit going into 2007, which caused performance to struggle in the first half. Gross’ avoidance of subprime mortgages and correct positioning more than paid off in the second half, though. His flagship Total Return Fund finished last year up 9.07% after fees, compared to 6.97% for the Lehman Brothers Aggregate Bond Index.
Paul Doane, executive director of the Arkansas Teachers Retirement System, praised PIMCO for sticking to its knitting before its call on the housing market reaped rewards. “It was disciplined, stayed the course and didn’t reach into the lower quality markets where all the action was,” he said. “[PIMCO] proved its insights were correct about the fixed-income markets, yield curves, Federal Reserve action, and generally avoiding junk bonds. The strategy is paying off in spades now and should only continue to do well given the continuing chaos in fixed markets.”
After the subprime crash, PIMCO moved fast to take advantage of buying opportunities and launched its $2 billion Distressed Mortgage Fund. It secured commitments from the Teacher Retirement System of Texas, Orange County (Calif.) Employees Retirement System and the Missouri Local Government Employees Retirement System, among others. From September onwards, PIMCO began increasing its exposure to corporate bonds and other forms of credit risk, although it remains slightly underweight credit and is focusing on very high quality assets.
“PIMCO has done a good job in making sure that what the product is called is what you get,” a consultant said. The bond behemoth bought in $2.5-2.6 billion in new business from public pension funds in 2007—an impressive tally for a year when investors didn’t expect to get much bang for their buck in bonds.