Last updated: January 3, 2014 10:22 pm

Pimco’s Bill Gross suffers tough 2013

Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO), speaks during an alumni event hosted by UCLA Anderson School of Management in Beverly Hills, California, U.S., on Thursday, Nov. 17, 2011.©Bloomberg

Bill Gross has faced criticism

The flagship bond fund run by Pimco’s Bill Gross last year suffered its worst annual performance in almost two decades, while equity funds focusing on smaller companies were buoyed by signs of a western economic recovery.

The $244bn Pimco Total Return Fund – until recently the biggest mutual fund in the world – lost 1.9 per cent in 2013, its worst fall since the bond market rout of 1994, after Mr Gross was wrongfooted by the US Federal Reserve’s decision to scale back monetary stimulus.

The mounting economic recovery in the US, which sparked the Fed move, and a return to stability in the eurozone have revived the animal spirits of many investors, who are now betting on a strengthening recovery in 2014.

As a result, big mutual funds that invest in equities – and particularly those of small companies with deep roots in the real economy – were last year lifted by a roaring stock market rally across most of the developed world. The S&P 500 gained 30 per cent in 2013, and the MSCI World index is close to its all-time high despite a tougher outlook for emerging markets.

The best performing fund with more than $10bn of assets last year was T Rowe Price’s New Horizons, according to data provider Morningstar, which benefited from investing in small, rapidly growing companies and handing a big allocation to technology groups like Twitter.

“Equities have done better than bonds, US equities have done better than foreign equities, and small-cap US equities have done best of all, especially those that are posting the fastest growth,” said Dan Culloton, fund analyst at Morningstar in Chicago.

Mr Gross correctly predicted that the US central bank would delay tapering its emergency asset-buying programme in September, prompting the money manager to tweet: “Not braggin’ but what did we tell you.” Yet the Fed still followed through in December, capping a miserable year for most bond fund managers.

“Our performance periodically, and sometimes for frustrating long stretches, stuffs our noses or aches our heads, and makes us wonder why we hadn’t been more careful about washing our hands during flu season,” Mr Gross wrote in a report in December.

His fund suffered record redemptions with $41.1bn pulled out in 2013, according to Morningstar. Clients took out $4.2bn in December alone.

Pimco’s flagship fund still slightly outperformed the wider US bond market in 2013 – which dipped 2 per cent – but T Rowe Price’s New Horizons fund, managed by Henry Ellenbogen, returned 49 per cent. On average, mutual funds with more than $10bn of assets gained 15.6 per cent last year, according to Morningstar.

Mr Gross is one of the world’s most celebrated investors, and has long been keenly followed for his market-moving and often acerbic commentary. But big bets on US Treasuries, inflation-linked bonds and Brazil sank Pimco’s flagship mutual fund last year.

The limp performance of global bond markets and the prospect of the US central bank slowly reducing its stimulus throughout 2014 have propelled investors into stocks. Almost $380bn gushed into developed market equity mutual funds last year, while over $72bn seeped out of bond funds.

Many investors and analysts expect the rally to continue in 2014. JPMorgan Asset Management estimates that there is almost $11tn still sitting in cash in the US alone, more than the total mortgage debt of American households, some of which is expected to find its way into stock markets.

Invesco Perpetual’s Income and High Income funds were the best performers in the UK, notching up gains of 29.1 per cent and 28.4 per cent respectively last year, in US dollar terms. Both are managed by Neil Woodford, head of equities at Invesco, but the feted fund manager announced in October that he would be stepping down to set up his own asset management shop this spring.

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