Pimco Surpasses Vanguard 500

“Bond king” Bill Gross has a new crown: His Newport Beach-based mutual fund now is the nation’s largest.

Gross’ Pimco Total Return fund ended September with $64.6 billion under management, while assets in the former leader, the Vanguard 500 Index stock fund, sank to $62.8 billion.

The rise of the Pimco bond fund and the decline of the Vanguard stock fund illustrate the dramatic shift in U.S. financial markets over the last two years. As the now 30-month-old decline in stocks has devastated equity fund portfolios, many Americans have shifted money into the relative safety of interest-bearing government and high-quality corporate bonds.

That has been a boon for Gross’ Pacific Investment Management Co., one of the world’s best-known bond investment houses.

Pimco Total Return lured $10.2 billion in net new investment in the first eight months of this year, making the fund the industry’s biggest winner, according to Boston-based Financial Research Corp.

Stock funds on balance have seen money flow out this year.

Falling market interest rates have boosted the value of high-quality bonds, fueling strong returns on many bond funds. Pimco Total Return Class A shares are up 7% this year, including principal appreciation and interest earned. Vanguard 500, which closely tracks the blue-chip Standard & Poor’s 500 index, is down 30.8% this year.

Scott Berry, analyst at fund tracker Morningstar Inc., said many investors have continued to reallocate assets as they find stock funds “far more volatile” than they realized.

But as bonds boom in popularity, some experts warn that investors could get whipsawed when interest rates rebound, which would depress bond values. Vanguard, which also manages bond mutual funds, has been cautioning its investors against chasing performance by getting carried away with fixed income.

“Bonds belong in most investors’ portfolios as a diversification tool. But if you’re just seeking greater returns than the stock market has provided in the last couple of years, you may be making a change for the wrong reasons,” said Vanguard spokesman John Woerth.

In an interview Monday, Gross acknowledged that a spike in interest rates--now near generational lows--would depress prices on most bonds. But as for the flood of money into Pimco Total Return and other bond funds over the last year, Gross said, “To the extent that investors are more diversified now, that’s all to the good.”

He said Treasury securities look the most “toppy,” as investors have flocked to government debt in a flight to safety. Pimco Total Return’s portfolio is focused more on corporate and mortgage debt, Gross said, although he conceded that rising interest rates could hurt most bonds.

Analysts have long given Gross high marks for his portfolio management skills. “It’s really hard to find a fund with a better long-term record or a more proven manager than” Gross, Berry said. Pimco Total Return has beaten a broad Lehman Bros. bond index seven straight calendar years.

Gross, 58, who co-founded Pacific Investment Management in 1971, has become to the bond market what Fidelity Investments’ Peter Lynch was to the stock market in the 1980s: the guru whose words carry enormous weight. Fortune magazine and others have dubbed him the “bond king.”

Gross is known for his humor-laced, and sometimes acerbic, written commentaries. Last spring, he assailed General Electric Co.’s debt load.

More recently, he said the Dow industrials could fall to 5,000 before the bear market is over. “Stocks stink and will continue to do so until they’re priced appropriately,” he wrote.

As for the Pimco fund’s new title as the industry’s largest, Gross said Monday: “It’s no knock on Vanguard 500 that stocks have been going down while bonds have held up. But as for our fund being No. 1 and not others, our team has done a great job of returning value to investors over the years.”