In the new version of his Pimco Total Return Fund, fixed-income mutual fund giant Bill Gross will no longer be a repo lender, according to a Bloomberg News story March 10.
The new fund, Pimco Total Return Fund IV, is a more conservative alternative to the Total Return Fund, which is the largest mutual fund in the world, Bloomberg reported.
Mutual funds, especially money market funds, are one of the largest lenders in the repurchase market.
From the story:
The new fund, identified as Pimco Total Return Fund IV in a February regulatory filing that details the changes, will forgo high-yield debt, borrowing to create leverage, and investing in options. It will serve as an alternative to rather than a replacement for Pimco Total Return, which had $237 billion in assets as of last month.
Gross, the co-founder of Pacific Investment Management Co. in Newport Beach, California, is tinkering with a strategy that helped him beat 98 percent of rivals over almost 24 years and attract $25.1 billion of new deposits last year. With Gross forecasting an end of the three-decade bond rally, Pimco may be targeting investors who prefer a more conservative approach over the risks associated with excess yields, according to Francois Otieno, a senior fixed-income analyst at Hewitt EnnisKnupp, which advises institutional investors.
“The total return fund is the largest mutual fund in the world, yet very few underlying investors have a clue on how their strategy is executed,” Otieno said in an interview from Chicago. “There is an appetite for a more conservative strategy in the marketplace.”
Gross’s move with his new fund takes him in the opposite direction from many money market mutual funds, where repo lending has been on the rise since the financial crisis, according to an October 3, 2010, report from Fitch Ratings, a credit rating agency.
Fitch said as of August 31 U.S. prime money market funds had $281.5 billion in repo transactions, or 17 percent of total assets under management. That’s up from 11 percent on average historically. U.S. government money market funds have traditionally allocated 42 percent of their assets on average to repos, Fitch said.
U.S. prime money market funds traditionally viewed repos as their main overnight liquidity management tool, Fitch reported. Since the crisis, they’ve seen repo loans as a less risky investment than asset-backed commercial paper (ABCPaper), a short-term collateralized investment popular with money market funds before the crisis.