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Replacing Gross: Four alternative funds to PIMCO Total Return

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Last week Bill Gross quit PIMCO - the firm he founded - to join Janus Capital in a move which had ramifications for many investors. Now as outflows on his PIMCO Total Return fund mount, where should investors turn?

Gross’ surprise exit last week caused jitters across bond markets after he announced plans to set up at rival Janus Capital.

Investors who had been fleeing his funds for the past 18 months picked up the pace, with a record $23.5bn of net outflows in September.

While his main investor base is in the US, many UK investors will also have held positions in his funds, including the $200bn PIMCO Total Return bond fund – still the world’s largest such portfolio.

So where should investors turn? Darius McDermott, managing director of Chelsea Financial Services, has highlighted four funds he thinks can provide similar returns to Gross.

Henderson Strategic Bond

Managed by John Pattullo since 1999, with Jenna Barnard becoming co-manager in 2006, McDermott said the pair were “one of the industry’s top duos”.

“While the pair currently have more than 45 per cent of the portfolio in high yield credit, they tend to avoid heavy cyclical industries.

“They prefer the stable, dull, but still quite levered opportunities – such as cable TV, mobile telecoms, healthcare and packaging.”

The £1.2bn fund has performed well against its benchmark Sterling Strategic Bond index, returning 7.3 per cent against the average return of 6.3 per cent over a year, and 30.1 per cent versus an average of 24.8 per cent over three years, according to FE Trustnet.

Nordea 1 – Unconstrained Bond

Run by “bonds veteran” Dan Roberts and what McDermott describes as “one of the most experienced teams in global fixed income, the recently launched fund is not yet a year old.

However, its cumulative performance year to date is 2.92 per cent against a sector average of 3.05 per cent, according to FE Trustnet.

McDermott said its investment strategy was likely to thrive over the long-term, the team having managed similar strategies for years.

M&G Optimal Income

One of the largest funds in the sector at £23bn, it has been managed by Richard Woolnough since 2004.

“Few, if any, fixed interest managers can demonstrate they can add value through management of interest rate exposure, asset allocation and stock selection.

“But that is not the case with Richard Woolnough, and the flexible mandate of this fund provides the perfect vehicle for him to exhibit his investment prowess.”

Ahead of the peer group over the last year, with a gain of 6.5 per cent against 6.3 per cent for the sector, the outperformance widens to 31.1 per cent against an average return of 24.8 per cent over three years.

TwentyFour Dynamic Bond

A fund that has grown in reputation over the past few years, the focused portfolio pays an attractive yield and is managed with an emphasis on credit risk, to ensure investor capital is protected to a degree.

Manager Gary Kirk, a founding partner of TwentyFour, has outperformed peers substantially over the last three years, growing 49.1 per cent to nearly double the Sterling Strategic Bond sector average gain.

McDermott attributed this to its unusual investment strategy, with the fund specialising in buying asset backed securities (ABS).

“It differs from most strategic bond strategies due to a consistent weighting to ABS, an area the group specialises in. The Fund currently has 20 per cent in ABS, while its largest sector allocation is to banks at 25 per cent.”

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