Some might say Bill Gross is the greatestbond manager in the
world.
The co-founder of one of the world's largestinvestment firms,
Pacific Investment Management (PIMCO), has a reputation that
was built upon an impressive string of gains through PIMCO's
flagship fund, the Total Return (
PTTRX
). The world's largestbond fund , withnet assets of $281 billion,
has performed especially well since the financial implosion of
2008, producing huge gains as investors shifted away from equities
and fled to the safety offixed-income assets.
But in spite of this incredible success, Gross isn't kicking
back and resting on his laurels. In fact, he just released a brand
new investment that directly competes with his highly successful
Total Returnmutual fund .
If this sounds like product cannibalization, then you're exactly
right.
The bond investor is borrowing a page from the Steve Jobs
playbook: Stay paranoid about your competition and constantly find
new ways to innovate your products and space. The Total Return
manager recognized that in a world of growing financial innovation,
he would have to cannibalize his own business or one of his
competitors would.
So with that in mind, Gross created the
Pimco Total ReturnETF (Nasdaq: BOND)
, anexchange-traded fund (
ETF
) that went public in March and replicates Total Return's
performance. This is great news for investors, because this new ETF
offers the best of both worlds: Exposure to the Total Return fund
and loads of financial innovation.
For starters, BOND provides investors with the additional
transparency that is unavailable through its mutual fund
counterpart. That's because actively-managed
ETFs
are required to disclose their portfolio holdings on a daily basis,
providing investors with much more insight into short-term
fluctuations and additional insight into PIMCO's long-term
outlook.
Beyond transparency, BOND is also a great bargain, with
anexpense ratio of 0.55% -- well below the 0.90% charged for the
Total ReturnA shares available to regular investors. It is also
only a pinch more expensive than the 0.46% charged to the most
powerful financial institutions in the world for Total Return's
institutional classshares . Speaking of institutional class
shares, not only are regular investors restricted from buying them,
but even if they could, then they would need a minimum investment
of $1 million, which would make it extremely unaffordable to most
people. Even the fund's common shares require a minimum $1,000
investment. BOND's "no minimum" investment makes it that more
attractive. BOND also enables investors to avoid paying the 3.75%
frontload that buying shares of the Total Return mutual fund
requires.
Because of all of these advantages, the early results for BOND
have been great, with shares up 10% on the year. This is more than
double the performance of itsbenchmark index , the Barclays US
Aggregate Bond TR, which has been up just 4.4% in 2012.
That amazing performance was also driven by this ETF's lower
assets under management. Starting with a smaller base of $100
million under management in February enabled Gross to utilize
strategies for which his $280 billion mutual fund is simply too
big. But the Street has already noticed the ETF's awesome
performance, pushing BOND's total assets under management to more
than $3 billion in the short nine months the ETF has been
around.
Risks to Consider:
As you can see in the chart above,bonds have seen huge gains in
the past three years as the Federal Reserve has worked feverishly
to push interest rates to record lows to support theeconomy .
Although the trend in interest rates is still low, with the
federalbalance sheet looking quite bloated, interest rateswill
eventually have to increase.
Action to Take -->
Gross became the undisputed "king of bonds" through his incredibly
successful Total Return mutual fund. But his new BOND looks to
improve on that model with additional transparency, a competitive
fee structure and no minimum investment requirements. And since the
new ETF is handily beating its index, investors have now a new
strategy to pump up their fixed-income returns.