Pimco Total Return's Hidden Risks

Bill Gross relies heavily on derivatives to execute his bets at this mammoth fund.

Of the $1.5 trillion that mutual fund investors held in taxable bond funds at the end of October, 13% was in Pimco Total Return. It is now the largest fund on the planet. Assets in the various classes of Total Return -- and in its near-clones, Harbor Bond (symbol HABDX), a member of the Kiplinger 25, and Managers Fremont Bond (MBDFX) -- now total more than $200 billion. Investors have plowed $42 billion into the Pimco fund alone in 2009.

To be sure, much of this money is chasing Total Return’s spectacular returns, both recent and long-term. Year-to-date through November 18, Total Return’s Class A shares (PTTAX) gained 13.7%. That follows a 4.3% return in 2008, an extraordinarily difficult year for most funds that didn’t have “Treasury” or “government” in their names. Over the past ten years, Total Return gained 7.1% annualized. That beat the Barclays Capital Aggregate Bond index by an average of one percentage point per year.

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Elizabeth Leary
Contributing Editor, Kiplinger's Personal Finance
Elizabeth Leary (née Ody) first joined Kiplinger in 2006 as a reporter, and has held various positions on staff and as a contributor in the years since. Her writing has also appeared in Barron's, BloombergBusinessweek, The Washington Post and other outlets.