Bill Gross piles into mortgage-backed securities

Veteran bond manager Bill Gross has offered a major sign of support for once toxic mortgage-backed securities by upping exposure to the asset class in his $245 billion Total Return Bond fund.

The September update for the Pimco Total Return Bond fund shows increased exposure to mortgage-backed securities, which rose from 32% in August to 38% in September.

The reputation of mortgage-backed securities took a hammer blow when the housing bubble burst in 2008 resulting in a federal take-over of Fannie Mae and Freddie Mac.

However Gross’ increased stake marks a trend among fund managers to revisit the asset class.

Recently, Tim Haywood, manager of three absolute return funds at Julius Baer, said he was investigating opportunities in this area in order to find an alternative to increasingly expensive sovereign bonds.

Similarly, in a video interview filmed at Citywire's Montreux event in May, Stephen Zinser of European Credit Management, revealed he was heading back into beaten-up  parts of the credit market reasoning at the time: 'We think the ABS sector is particularly cheap. Equally we don’t see the risks in credit, we see the risks out there in the macro environment, the likes of Greece and others, and other equity markets getting ahead of themselves.'

In a recent Citywire Global readers’ poll, fund selectors voted in favour of supporting a fund manager if he sought to invest in this asset class.

Market commentators – such as acerbic blogger Zero Hedge – have also shown their support for Gross' strategy, viewing it as an indication that the next item on the Federal Reserve’s quantitative easing hit-list will be mortgage-backed securities.

Other changes in Gross’ portfolio exposure for September saw him increase sector allocation in the emerging markets from 12% in August to 13% in September, as well as hiking exposure in non-US developed markets by 2%, from 18% to 20% for the month.