By Sam Mamudi
The manager of the world's largest bond fund has raised the pace
at which he's leaving mortgage-related securities.
Bill Gross, manager of Pimco Total Return Fund (PTTRX), has been
busy reducing his exposure to mortgage-related securities, selling
roughly $30 billion of assets in September and leaving his fund
with its smallest portion of mortgage holdings in more than four
and a half years.
Most of the securities were agency mortgage-backed
securities--debt issued by the government-sponsored mortgage
finance firms, Fannie Mae (FNM) and Freddie Mac (FRE) and also
Ginnie Mae, which guarantees mortgage loans made to low-income
borrowers.
Total Return Fund's holdings of mortgage-related securities fell
from 38% of the portfolio on Aug. 31 to 22% on Sept. 30, the latest
date for which figures are available. On July 31, 47% of the fund
was in mortgages--the fund's largest category holding at that
time.
The fund's assets under management on July 31, Aug. 31 and Sept.
30 were $169 billion, $177.5 billion and $185.7 billion,
respectively.
The last time Total Return Fund had less allocated to mortgages
was Feb. 28, 2005, when the level was 19%. The fund's assets under
management at that time were $75.8 billion.
The fund explained the sell-off in its Quarterly Investment
Report. "Pimco's significant overweight to high-quality, agency
mortgage-backed securities has recently been strongly positive for
returns," it noted. "With MBS valuations having richened
substantially, and the Federal Reserve's mortgage-purchase program
slated to end in March of next year, Pimco plans on moving to an
underweight in an effort to benefit from an expected cheapening of
agency MBS."
The Fed started buying agency-backed mortgages in January in an
attempt to bring down mortgage rates in the face of the credit
crisis. Since then, it has bought the majority of so-called agency
MBS on the market. Once the Fed stops buying mortgages, the fall in
demand will lead to a drop in MBS prices.
Total Return Fund's allocation to mortgage-related securities in
the past year peaked at 86% on Feb. 28. At the time, the fund had
$138.4 billion in assets. By the end of March, it had cut the
allocation to 66% of the portfolio and was steadily reducing its
exposure until September's $30 billion sell-off.
"By all measures, mortgages look really rich right now," said
William Chepolis, head of Retail MBS at DWS Investments, a unit of
Deutsche Bank AG (DB). "Everyone knows it, and they're trying to
get out of their positions by the end of the Fed program."
But, he added, some people are still staying in. "There are
people who figure they have two to three months" to still enjoy the
benefits of government involvement in the market.
Chepolis said he believed that Wall Street banks were likely big
buyers of Pimco's sell-off. "Banks like the zero credit rating. ...
No one knew Pimco was selling until they announced it," which
suggests that it had lined up deals with a few banks.
Finally, Chepolis pointed out that he's in agreement with
Pimco's new approach. "I would be in favor in scaling back a
little--maybe not everything, but certainly taking profit off the
table."
-Sam Mamudi; 415-439-6400; AskNewswires@dowjones.com
