Round Two: Pimco Vs. BlackRock



Bob Doll, chief equity strategist at BlackRock, recently made headlines by telling Bloomberg television that the Fed won’t be launching any new “quantitative easing”—QE3 for market insiders—due to the recent strength in the U.S. economy.

In Doll’s predictions for 2012, he’s also expecting a rise in Treasury yields and double-digit gains for U.S. stocks.

On the other hand, Pimco’s Bill Gross is not only expecting QE3 this year, he’s saying several more Fed bond-buying programs are coming down the line as well.

More specifically, Gross is betting heavily on mortgage-backed securities (MBS), expecting the Fed’s bond purchases will be focused on MBSs to help the housing market.

In fact, if you look at his flagship Total Return Fund’s holdings as of Dec. 31, 2011, MBSs accounted for roughly 48 percent of its weighting. Treasury holdings were also increased to 30 percent by the end of last year, from nil before last summer.

I’ll admit that pitting the two giant asset managers against each other might be a bit dramatic and mostly media-driven. Still, it makes for good conversation, especially since Round 1 clearly went to BlackRock.

Just to recap, last summer, as QE2—the Fed’s second bond-buying spree—was coming to a close, Rick Rieder, BlackRock’s chief investment officer of fixed income, made quite a splash with his bullish outlook on Treasurys. At the time, his view differed significantly from Gross, who thought Treasurys would be hit hard once QE2 ended.

We all know what happened next.

Rieder was spot on—not only was there no sell-off in Treasurys, but the increased volatility and risk-off trading led to a huge rally in Treasurys. The eight top-performing ETFs last year were focused on U.S. Treasurys, and that’s not including leveraged funds.

Meanwhile, Gross’s Total Return Fund, which eliminated all Treasury holdings before the summer of 2011, massively underperformed its peers, causing Pimco’s founder and co-chief investment officer to apologize to his investors.

But even though his flagship fund saw large outflows and took a confidence beating in 2011, Gross didn’t earn the nickname “Bond King” for no reason. With over $244 billion under management, his Total Return Fund has been around since 1987, and remains the largest bond fund in the world.

The good news for Gross followers is that Pimco recently announced that the highly anticipated ETF version of its Total Return Fund will begin trading on March 1, 2012, under the ticker “TRXT.”

For those who want MBS exposure but don’t want to wait around for “TRXT” to launch, there are a few ETFs out there that specifically target MBSs as well.

The iShares Barclays MBS Bond Fund (NYSEArca:MBB) is a $4.2 billion fund that holds only investment-grade MBSs and has a trailing 12-month yield of 3.28 percent.

The Vanguard Mortgage-Backed Securities ETF (NasdaqGM:VMBS) is another fund that specifically targets MBSs. VMBS is a $150 million fund that’s seen some large inflows as a percentage of its assets over the past few months. It carries a trailing 12-month yield of 2.16 percent.

Even for those who want more diversified, broad-based exposure to MBSs, the iShares Barclays Aggregate Bond Fund (NYSEArca:AGG) and the Vanguard Total Bond Market ETF (NYSEArca:BND) both have over a quarter of their weightings in MBSs. Both funds track an aggregate bond index, so they include a mixture of Treasurys, MBSs and corporate bonds.

On the flip side, investors leaning toward Doll’s outlook on rising Treasury yields might want to stay away from Treasury funds, such as the iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca:TLT), which had spectacular returns in 2011. (It was the No. 5 fund on the top-returners list last year.)

As for Doll’s U.S. equities call, even if he’s wrong and QE3 is implemented, he probably doesn’t have much to sweat about. I say that because judging by what happened after the Fed announced QE1 and QE2, equities actually took off.

Of course at the end of the day, no one really knows what the Fed will do.

Still, it’ll be interesting to see if BlackRock gets it right again, or whether Gross will be right this time around and return his flagship Total Return Fund back to its glory days.



Disclosure:I am currently long AGG.


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Copyright ® 2012 IndexUniverse LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: AGG , BND , MBB , TLT , VMBS



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