Pimco's Gross Unwinds Mortgage Positions
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."
