Does Star Fund Manager Bill Gross Deserve a Break?

BOSTON (TheStreet) -- Don't bet against the house -- well, at least Bill Gross' house, as represented by his Pimco Total Return Fund (PTTRX), the world's largest bond fund.

The iconoclastic bond fund guru is getting bashed for turning against Treasury bonds in the first quarter of this year when the securities rallied.
Bill Gross

That's when he sold and shorted Treasuries, and other government-related debt securities, citing the nation's debt crisis. He said the failure to properly address that issue would create "low to negative real interest rates."

The eurozone crisis superseded those concerns for many investors, and they stampeded into Treasuries to seek safety. As a result, Gross' fund is underperforming its peers this year, and new money inflows have all but dried up.

The Total Return Fund has a gain of 1.3% this year through Oct. 13, far short of the 6% increase in the Barclays Capital Aggregate Bond Fund Index. Gross' mutual fund is in the bottom 10% in its category this year, according to Morningstar.

The past three months have been particularly tough, as the fund lost 2.3% of its value as Treasuries rose. The Barclay's index gained 2% in the same period.

But give the guy a break. A couple of bad quarters don't mean Gross has lost his golden touch. And how many times have you heard "buy the manager, not the fund"? It still holds here.

Gross recently earned Morningstar's Fixed-Income Manager of the Decade award in the period ending December 2009, which should count for something when trying to pick a bond fund for your portfolio.

Over the past three years, Total Return has a 10.2% annualized advance, placing it in the top third of its peers. It only gets better the longer you look out, including a league-leading 7.2% annual return over 15 years.

Investors are largely avoiding Gross' fund this year. They've given him about $183 million to invest, compared with $18 billion last year and $58 billion in 2009, the Wall Street Journal reported, citing Lipper data.

But why pick on Gross for that, when all taxable bond fund inflows were at $93 billion through Sept. 30, or about 58% of what they were in the same period last year? Investors have hemmed and hawed over the appeal of bonds and bond funds this year as a rally seemed to get ahead of itself with the yield on the 10-year Treasury sinking to less than 2%.

And looking at the big picture, Total Return is already the biggest actively managed mutual fund, with assets of $242 billion. One has to wonder if Gross is interested in taking in more money at this point.

Gross clearly erred in his strategy early this year, Morningstar bond fund analyst Eric Jacobson said last month, but "the error did little to harm this fund's stellar long-term record, and, far from signaling a fund hamstrung by its size, relatively dramatic changes to its composition in the past year actually suggest the opposite." That's because his decision to boost non-index bets, something that many fund managers don't have the guts to do, "has solid logic behind it."

And such a move "has also highlighted the occasional risk of underperformance versus the broad market that he and many others have been taking by stepping away from the most liquid, benchmark-dominating sectors," Jacobson said.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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