Pimco Stock Expansion Stumbles as Gross Says Equities Cult Dead

When Gross talks, market listens, usually.

Aug. 6 (Bloomberg) -- When Bill Gross started Pimco’s most recent effort to expand into stocks three years ago, he vowed not to repeat the mistake he made in the 1980s, when his bond traders overwhelmed a handful of equity managers at strategy meetings, eventually prompting them to quit.

Last week, the manager of the world’s largest bond fund at Pacific Investment Management Co. in Newport Beach, California, compared long-term returns from equities to a “Ponzi scheme” and said returns of 6.6 percent above inflation, known as the Siegel Constant, won’t be seen again. “The cult of equity is dead,” Gross, 68, said in an Aug. 2 interview with Betty Liu on Bloomberg Television.

“This makes it even more important to invest globally and actively select the companies best-positioned to deliver attractive returns,” Kashkari, 39, said in an e-mail.

Pimco’s first two equity strategies, EqS Pathfinder Fund and EqS Emerging Markets Fund, account for about $2.6 billion of the firm’s stock assets. Neither is beating its benchmark index in 2012, and both lagged behind at least 62 percent of peers as of Aug. 2, according to data compiled by Bloomberg.

Another effort was set up in 1999 by Pimco’s then-parent company, which created an equity unit separate from the bond business to take advantage of the Pimco name. Five years later the unit was one of several fund companies accused by the Securities and Exchange Commission of allowing a hedge fund to engage in market timing, a practice of making short-term trades to exploit market inefficiencies, and was dissolved after paying fines and repayments to settle the lawsuits. It didn’t admit or deny wrongdoing.

‘Stepchild’ Funds

Pimco has added smart stock pickers who will benefit from the firm’s resources and be compatible with its macroeconomic view of a larger global role for developing nations, said Kashkari, who also worked as an investment banker at Goldman Sachs Group Inc. The firm, which manages $1.82 trillion in assets, has hired about 50 people for its equity strategies, which are all globally focused.

Franklin Team

 Pimco’s two biggest and longest-running equity funds have been less volatile than their benchmark indexes. The standard deviation of return, a measure of price swings, for Pimco EqS Pathfinder was about 16 percent over the past year, compared with 22 percent for the MSCI World Index, according to data compiled by Bloomberg. Pimco EqS Emerging Markets Fund had a standard deviation of return of 25 percent, compared with 27 percent for the MSCI Emerging Markets Index.

 Pimco EqS Dividend Fund, started last December, is run by Brad Kinkelaar and Cliff Remily, who joined from Thornburg Investment Management. The fund, which invests in dividend- paying stocks globally, returned 6.2 percent this year through Aug. 2, trailing 72 percent of rivals.

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