In an investor note, the PIMCO founder and co-chief investment officer said there is a new era of lower expectations ahead which will see continued market movements and the need to approach with caution.
The Euro Stars A-rated manager, in a departure from his more colourful market commentaries, offered a stern appraisal of the current economic conditions and set out how, along with his co-CIO Mohammed El-Erian, his firm is aiming to preserve investor capital.
‘Given the uncertainty we are forecasting, we are generally defensive while being, as Mohamed calls it, selectively offensive,’ he said.
The fund manager reasserted his preference for so-called ‘cleaner, dirty shirts’ in the sovereign bond market, with Canada, Mexico, Brazil and the United States topping his allocations. This is due to their independent currencies and relatively less problematic balance sheets.
Government bonds currently account for 35% of his portfolio allocation, increased from 31% a month earlier. Meanwhile, Gross has started to rebuild his position in EM debt, which now accounts for 8% after he cut from 10% to 7% in March.
Meanwhile, Gross also referenced his large allocation to mortgage-backed securities, a position he has built since late last year and now makes up 52% of his sector allocation.
‘We’re identifying value among mortgage-backed securities, which offer a yield advantage over Treasuries of 1% to 1.5% with little sacrifice of quality. In addition, we are looking to real, inflation-hedging assets, such as TIPS and commodities to help guard against confiscation risk.’
On the topic of monetary stimulus, Gross, echoing comments made by US equity manager David Watson last week, criticised the impacts of money printing. He said financial systems are now ‘addicted to credit expansion’ and the need to now continue this practice.
‘These easing programmes – QEs 1 and 2, Operation Twist in the US and the eurozone’s LTROs, among others – were meant to ultimately deploy funds to the rest of the economy and reflate asset prices. These programmes have now been effective.’
‘However, absent cooperation of fiscal policymakers and the re-entry of private actors, they will likely need to continue in some form.’
Gross said the PIMCO investment committee had been left to debate who would buy sovereign securities when the central banks withdraw their monetary support.
‘Creditors have a choice, and with 10-year Treasuries hitting a record low of 1.5%, they may decide to eventually look elsewhere.’
The PIMCO Total Return Bond fund has returned 24.1% over the past three years. Its Citywire benchmark, the Citigroup United States WGBI TR, rose 18.75% over the same period.