What Bill Gross Is Selling Now

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Beyond bear-market fund managers and securities lawyers, few people have emerged from the recent financial crisis ahead of the game. One who has, though, is legendary bond investor Bill Gross.

With investors piling into bonds in the wake of the stock market's swoon, one of the biggest beneficiaries has been Gross' PIMCO Total Return Fund (PTTAX), which has been growing at the eye-popping rate of $300 million a day. The fund is growing so quickly for good reason -- Gross has a good track record of getting his macroeconomic calls right. And right now, the bond maven is making a move out of one high-profile sector.

Leaving home base
Recent data show that Gross has been hightailing it out of the mortgage sector. Gross sold nearly $30 billion of mortgage-related securities from the Total Return Fund in September. Most of the bonds sold were agency mortgage-backed securities (MBS) from the likes of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The fund's allocation to mortgage bonds fell from 47% back in July to just 22% at the end of September, marking the lowest level of such assets in almost five years.

As fellow Fool Chris Jones recently wrote, Gross sees slower growth and muted profits ahead, which will make things difficult for investors. He believes the current environment is fraught with economic risk and that bond investors should do their best to minimize that risk in their portfolios.

That belief was one of the primary motivations behind the unwinding of the Total Return Fund's heavy mortgage position. Gross characterized the move as an effort to take some money off the table in an area that had become more richly valued. While being overweight in mortgage securities has generated some pretty returns for the fund's holders, Gross feels that with rising valuations and the end of the government's mortgage-purchasing initiative, the area is rather fully valued. In fact, Gross and his team expect mortgage-backed securities to decline in value in the near future.

So if Gross is making a beeline for the exit in this area, should you, too?

Follow the money
While no one in the investment world has a perfect track record, Bill Gross comes a lot closer than most people. Given how far this sector has come, it's not at all unexpected that mortgages could stall. Now that's not to say there couldn't still be some juice left in the sector in the near term, especially because the government's purchasing program still has a few more months to run. But odds are good that the easy money has already been made.

If you're invested significantly in bonds, you might want to take a second look at your mortgage exposure. If you invest in individual bonds, think about moving some money into Treasuries or high-quality corporates. For instance, the Total Return Fund owns corporate bonds issued by companies like Philip Morris International (NYSE: PM), Kraft Foods (NYSE: KFT), and IBM (NYSE: IBM).

If you own bond funds, double-check how much exposure you have to mortgage bonds. Because it's more difficult to coordinate single-sector exposure with mutual funds, it probably doesn't make sense to try to sell your current funds and buy new funds with lower mortgage exposure to reduce your overall allocation. Just be aware of how much you've got allocated to this sector so there won't be any surprises.

Down but not out
One thing to note is that even as Bill Gross is shifting assets out of the mortgage sector, he's not fleeing the scene completely. He's taking some money off the table in expectation of slowing returns in that area, but still retains some exposure.

That's a good lesson to take to heart, no matter if you're dealing with stocks or bonds. For example, the folks over at Dodge & Cox Stock (DODGX) have had several technology stocks among their top holdings for quite some time now. In recent months, though, they've been cutting back a bit, reducing their positions in Motorola (NYSE: MOT) and Hewlett-Packard (NYSE: HPQ). But the fund's overall tech allocation is still pretty high. The team is playing it smart -- taking some profits after a decent showing from the tech sector, but still keeping skin in the game.

Time will tell whether Gross made the right call by stepping down some of his mortgage positions. But the truth is there are a few investment gurus in this business whom investors would be wise to watch and learn from, and Gross is definitely one of them.