Better Know a Fund Manager

Welcome, Fools, to part nine of our several thousand-part series, "Better Know a Fund Manager," which is loosely, but not too loosely, based on Stephen Colbert's "Better Know a District" from The Colbert Report.

Like Stephen and his thorough investigations into America's congressional districts, each week I take a look at a fund you may want to own. What's on tap this week?

PIMCO Total Return (PTTAX)

Expense ratio

0.9%

Fund size

$92.9 billion in assets

1-year return

0.44%

5-year return

3.04%

10-year return

Not available

Sources: PIMCO

Meet Bill Gross
The fightin' team at PIMCO Total Return is led by Bill Gross, who Motley Fool Champion Funds advisor Shannon Zimmerman says is "simply the best bond-fund manager in the business."

Oh, really? Yes, really. Just three bond funds returned more than 8% annually over the 10 years ended in October 2004. One was PIMCO Total Return. Another was Calvert Income (FUND: CFICX  ) , which carries a 3.75% front-end load. The third is also managed by Gross and has beaten the benchmark since joining the Champion Funds portfolio nearly two years ago.

Don't be surprised by that track record, Fool. Gross knows how to make a gamble pay off. Before entering the high-stakes world of fixed-income investing, he played blackjack professionally. Gross said as late as 2002 that the risk-spreading elements of gambling and investing are similar. Perhaps his knack for calculating odds has contributed to his vast fortune? Forbes lists Gross as one of the 400 richest Americans, with a net worth exceeding $1.1 billion.

How he invests
Gross closely watches macroeconomic factors in his investing. The literature for Total Return calls it a "top-down process," whereby Gross and his team develop a three- to five-year outlook for the global economy and interest rates. Everything is considered: currency movements, the yield curve, the credit markets, and so on. It's a complex job, and Gross does it better than anyone else. His approach is so good, in fact, that over the past five years Total Return has beaten the Vanguard 500 Index (FUND: VFINX  ) 4.61% to 2.38% a year. That's right; a bond guy has stuck it to the stockinistas. Eat that, Wall Street.

Where do those outsized returns come from? Balancing risk. According to the latest annual shareholder report, Total Return had 57% of its assets in U.S. Government bonds as of March 31. Yet, at the same time, 1.2% of Total Return was in the 2016 bonds offered by General Electric's (NYSE: GE  ) Capital division. They're paying at least 4.25%. Nice.

Gross is also unafraid of making a call on the economy and then putting his money where his mouth is. For example, in December, Gross spent $1.3 million of his own cash on shares of PIMCO Floating-Rate Strategy (NYSE: PFN  ) , a closed-end fund designed to take advantage of rising interest rates. Today, he's sitting on a 6.9% gain in seven months while getting paid an 8.9% yield to hold the shares. That's guts and zazz in one handsome package, baby.

Is this fund for you?
Should you find a spot for PIMCO Total Return in your fund portfolio? Normally, I'd say no. Not because of Gross' record, but because of the front-end sales load, which sits at 3.75%. Yuck.

Nevertheless, a diversified portfolio should always carry a sampling of bonds, and there's no one better than Gross at earning returns in the bond market. Plus, you already know he's willing to invest alongside those who invest in his firm's offerings. It's those stellar attributes that led Shannon to include a no-load Gross fund in his Champ portfolio two years ago, and it hasn't disappointed. (It also isn't the only one. Try the service free for 30 days to learn more.)

Of course, stockinistas and growth huggers aren't likely to be pleased by Total Return. They'll consider it too conservative. Well, boo-freaking-hoo. Professor Jeremy Siegel did a 200-year study that found that real stock returns tend to equal 7% annually. PIMCO Total Return has averaged 7.6% per year since opening for business in May of 1987. It doesn't get much better than that, Fool.

And that's this week's profile. See you back here next Thursday, fund nation. Good night.

Think you can't beat the market with funds? Think again! The selections in Shannon Zimmerman's Motley Fool Champion Funds portfolio are up an average of 17%, versus just 7% for their comparable benchmarks. Ask us for an all-access pass to get an unfettered look at all of Shannon's picks, manager interviews, and model portfolios. Go ahead. It's free for 30 days, and there's no obligation to buy.

Fool contributor Tim Beyers is a regular viewer of The Colbert Report. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what else is in Tim's portfolio by checking his Fool profile. The Motley Fool has an ironclad disclosure policy.


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