Pimco fund may buy equity-linked securities

THE WORLD’S biggest bond fund, run by Bill Gross at Pimco, has opened the door to start buying equity-linked securities, further fuelling the debate about the direction of bond markets.

The $250 billion Total Return Bond fund is expanding its guidelines and will be able to invest up to 10 per cent of its total assets in preferred stock, convertible securities and other equity-related securities, Pimco said in a filing. The fund will not invest in common stock.

The announcement comes as some Wall Street investors and strategists have begun to predict the long-running bull market in bonds, which helped catapult Mr Gross to wealth and fame, may be coming to a close.

The financial crisis prompted investors around the world to flee to the safety of bond funds.

But the yield on the benchmark 10-year US Treasury bonds is up about one percentage point to 3.51 per cent since early November. The tax cuts extension has raised expectations that both the economy and inflation, which erode bond returns, could grow more quickly.

In November data from Lipper, the fund tracker, showed there was an outflow of about $2.1 billion from the Total Return Bond fund. This was its first in nearly two years, even if it was small against the total assets managed and inflows of nearly $35 billion this year. “Pimco Total Return is a very diversified portfolio,” said Jeff Tjornehoj, head of Americas research at Lipper.

“[The change] is part of the evolution of an investment strategy that looks for opportunities and it would indicate that [Mr Gross] may see one here.”

Mr Gross was not available for comment.

It is not uncommon for bond funds to invest in securities linked to equities. Mr Gross pioneered using bond investments to create total return through capital appreciation, a strategy more akin to the stock market. The fund has an average return of 8 per cent a year since its inception in 1987.

– (Copyright The Financial Times Limited 2010)