Former "Bond King" Bill Gross, who popularized the “Total Return” strategy in the 1980s, has criticized current proponents of that approach, saying almost all such funds have become quasi “index funds” in the last five years.
Gross, the co-founder of PIMCO, said some of these "Total Return" funds are actively managed with the ability to go low in terms of maturity duration, but they all seem to be chasing “index-plus” performance as opposed to “total return” management.
“Perhaps they should all change their names to 'index plus' to reflect that reality,” he said in an article on his website.
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Gross said that when he had started a total return fund, his idea was to combine interest income with capital gains in bond prices to produce a “total return” over and above current yields.
Gross said it worked famously until the beginning of this year. “Admittedly, a secular bond bull market was a huge tailwind, but PIMCO’s 'Total Return Fund' used other non-index strategies to differentiate itself from the pack. "The years 2007-2009 were particularly reflective, voiding subprime mortgages much like Michael Burry’s 'Big Short' in the hedge fund space,” he said.
This led to PIMCO's total assets doubling to $2 trillion in the ensuing few years, Gross added.
Lost Vision: He pointed out that between 2014 and now, some of the leading proponents of this strategy have lost their total return “charter," or vision, adding that their year-to-date returns are down between 16% and 18%.
Gross also observed that individual investors have been misled. “Would they have preferred to pay 50 basis points for the privilege of outperforming a bond market index and losing 15% of their money?” he questioned.
Suggestion: Gross said such bond funds should change their names or perform their original mission of returning current bond market yields in addition to alpha from non-durational sources.
The expert also highlighted an ETF in which he invests. “I have been investing in an ETF that charges only 0.03% in fees and is accurately labeled as iShares 0-5 Year TIPS Bond ETF STIP with the NYSE stock symbol of 'STIP.' Truth in advertising,” he said.
Some of the total return ETFs have given negative returns since the beginning of 2022. For example, the PGIM Total Return Bond ETF PTRB is down over 18% since the beginning of the year, while the T Rowe Price Total Return ETF TOTR is down over 19% in the same period.
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