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Systemic Risk - PIMCO Total Return Fund?


benhacker
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So I've followed Bill Gross's comments for a while.  I've never thought much of him, but he seems to have done well.  My brother was sharing with me the other day about how he was shocked when he tried to read through the PIMCO holdings summary for the Total Return fund (in his 403(b) account) because he said it was incomprehensible.  Lot's of derivatives, short transactions, etc.

 

Well, i just got around to opening up the annual report and holy crap...

 

http://globaldocuments.morningstar.com/DocumentLibrary/DocHistory.aspx?clientid=dotcom&secId=FOUSA00EH4&display=PTTRX###

 

First, I didn't realize the fund now runs >$150B and has pages and pages of derivatives.  All kinds of CDS, currency forwards, reverse repos, etc.  Morningstar lists the fund as ~145% long / 45% short.

 

This is absolutely the most "well respected" bond fund in the world, and all 401(k) administrators (nearly all) provide this as an option, and it's often the default recommendation.

 

Has anyone really spent some time with this funds filings?  I'm not a techno-phobe, but certain activities strike me as inappropriate for a "mutual fund" and this thing doesn't look at all like any mutual fund I've ever seen...

 

I might dig deeper, but I was wondering if anyone had seen a really good break down of this fund... it will probably take a lot of work to break it apart.

 

Thanks,

 

Ben

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LOL... the most recent SEC N-Q filing for the PIMCO group of funds is 50MB.

 

http://www.sec.gov/Archives/edgar/data/810893/000119312509038955/0001193125-09-038955-index.htm (not a direct link).

 

Wow... I somehow think that no one has really dug in here who has the skeptical mind needed to give this option it's due diligence.  I don't Bill Gross is a fraud, but I somehow think the level of Due Diligence here by most who recommend this pick is just to say "Bill Gross is the bond guy... right?"

 

Amazing, this thing is as complex as some banks...

 

Ben

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LOL... the most recent SEC N-Q filing for the PIMCO group of funds is 50MB.

 

http://www.sec.gov/Archives/edgar/data/810893/000119312509038955/0001193125-09-038955-index.htm (not a direct link).

 

Wow... I somehow think that no one has really dug in here who has the skeptical mind needed to give this option it's due diligence.  I don't Bill Gross is a fraud, but I somehow think the level of Due Diligence here by most who recommend this pick is just to say "Bill Gross is the bond guy... right?"

 

Amazing, this thing is as complex as some banks...

 

Ben

 

When you are 150 billion fund, and want to do long/short, you would use whatever instruments you can find.  He just has to be correct on his macro calls and check his counterparties.

 

The key is to never try to manage a 150 billion fund :)

 

But complexity sometimes work, I used to work on a compiler that was 12 million lines of code managed by 9 developers.  our top developer was managing 3 million lines of code (that's about 600k pages of interdependent functions etc written in about 4 different languages).  That entire code base had very little bugs in it.  It all depended on who was managing it.

 

Yeah...you have IT to thank for increased complexity.

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  • 4 years later...

http://finance.yahoo.com/news/exclusive-pimcos-gross-declares-el-015522722.html

 

If people aren't selling now, I don't know what they are thinking...

 

1) Low yield, long bull market in bonds -- Check

2) Manager who is up in years, and potentially going paranoid (if the Reuters attribution(s) are to be believed) -- Check

3) Corporate structure seemingly under turmoil (note that El Erian left once already, then came back, then left again... someone thinks his balance is needed on the organization it seems) -- Check

4) PIMCO Total Return too big to monitor ($250B +) -- Check

5) Business owners (Allianz) that has no incentive to step in until it's too late given the star power -- Check

 

What could go wrong? You have a quarter Trillion dollar hedge fund run by someone most believe is infallible, and the owners generally don't have the capability or inclination to do any due diligence at all... seems great to me.

 

Ben

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I have some 401k money in the Total Return Fund. I have no plans to redeem unless Bill Gross leaves. Maybe I enamored with Gross' cult of personality? I have zero expertise in fixed income. My small allocation  to bonds are all through mutual funds. Pimco Total Return Fund, DoubleLine Total Return Bond Fund, Berwyn Income Fund. 

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  • 4 months later...

Another tidbit.

 

Just seems to me like a classic strategy to blow up when done in their size, and in a mutual fund structure:

 

http://www.talkmarkets.com/content/us-markets/pimco-steals-aigs-playbook?post=46014

 

Ben

 

I'd be more convinced if the article went into detail about the lack of hedges or why they will be ineffective. It's not enough to say that he's writing insurance and leveraging up without putting the amount of leverage or hedging into context.

 

If he's putting the premiums in interest rate calls, floating rate notes, and etc then I'm not so certain that this would end badly. I would want more clarity on this if I was an investor in his funds though.

 

On a side note, this new normal environment sounds like an environment that is always on the brink - slow growth and low interest rates set the stage for higher inflation or deflation depending on the policy response. Clearly Gross doesn't think there will be inflation but PIMCO was also one of the counterparties for Fairfax's deflation derivatives. Seems like Pimco might even get hurt on the deflationary side of things despite being a bond fund. The sweet spot for Gross is staying right in the middle where we are, but I think that's alot to ask for another 3-5 years

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I agree the article wasn't great Zach.

 

My main beef is that Gross seems to consistently be selling out of the money derivatives (whether on rising or falling rates, bond insurance, etc).  I'm certain that he is hedging some, but from what I can make of the holdings, it seems mostly unhedged.

 

I think my main concern is just how dramatically outflows + illiquid bets can turn if a few odd things happen. 

 

I guess we'll see, at least the fund is now shrinking which makes me feel better... I truly do think the size of the fund could cause problems if something were to go wrong.

 

 

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  • 2 months later...

Well, I guess we'll get to see what the wind down of a large bond fund looks like now, I bet $50B in assets leaves in the next few weeks... The total return strategy is managing about $200-250B right now.

 

I hope all those derivatives are pretty liquid. :)

 

Gross leaving to Janus (seems strange...).

 

Ben

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Well, I guess we'll get to see what the wind down of a large bond fund looks like now, I bet $50B in assets leaves in the next few weeks... The total return strategy is managing about $200-250B right now.

 

I hope all those derivatives are pretty liquid. :)

 

Gross leaving to Janus (seems strange...).

 

Ben

 

Do you smell any opportunity that will soon be caused by forced selling here? :)

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Well, I guess we'll get to see what the wind down of a large bond fund looks like now, I bet $50B in assets leaves in the next few weeks... The total return strategy is managing about $200-250B right now.

 

I hope all those derivatives are pretty liquid. :)

 

Gross leaving to Janus (seems strange...).

 

Ben

 

Do you smell any opportunity that will soon be caused by forced selling here? :)

 

There's a lot of selling pressure on the CEFs like PHK and PGP.

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Did i misread something or do they have a nominal amount of 1.1 trillion of EUR/USD futures in their holdings as of 03/31/2014? (PIMCO Total Return Fund A (PTTAX), Annual report page 25/26)

That would be a loss of 80 billion$ in the last 3 month. Holy cow, please tell me that i am wrong.

 

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Did i misread something or do they have a nominal amount of 1.1 trillion of EUR/USD futures in their holdings as of 03/31/2014? (PIMCO Total Return Fund A (PTTAX), Annual report page 25/26)

That would be a loss of 80 billion$ in the last 3 month. Holy cow, please tell me that i am wrong.

 

Sometimes i post really stupid shit :). If that would be the case the NAV would have fallen a lot, so they probably sold their positions in the meantime.

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