The Strategist

MetWest becomes the largest US bond fund

12/07/2016 - 15:39

Pimco Total Return Fund, which has been the largest active fund investment in US bonds for two decades, lost the lead to Metropolitan West Total Return Bond Fund.

According to Morningstar Inc., assets of MetWest fund increased by approximately $ 10 billion since beginning of the year, and amounted to about $ 79.6 billion as of the end of November, compared with $ 78.5 billion in the fund managed by Pacific Investment Management Co. (PIMCO).

MetWest Fund was established by three veterans of PIMCO in 1997. Now it is controlled by TCW Group Inc.

MetWest’s average annual income on investment has persisted at 5.94% over the last ten years. It is the second largest figure among 293 similar funds tracked by Morningstar. The organization invests in corporate, government and mortgage bonds.

The largest bond fund in the world is Vanguard Total Bond Market Index fund, owned by American investment company Vanguard Group. Assets under the group’s management amount to $ 279 billion. Back in 2015, it has also overtaken Pimco by taking the first place.

Pacific Investment Management Co. invests in riskier bonds of European banks. In October, it took part in placement of Deutsche Bank AG’s senior bonds. Besides, information available shows that PIMCO accumulated maximum amount of European banks’ debt securities, which are included in the supplementary capital of the first level.

These bonds, the so-called AT1, are first to suffer losses during the crisis. If the bank's capital adequacy levels fall too low, regulators may prohibit the institution to pay interest on such bonds. In case of crisis, they can be converted into equity or get written off. Pimco’s investments in these securities amounted to $ 10 billion. This is three times greater than volume of similar bonds in portfolio of Invesco Ltd., and five times higher than investment of debt market giant BlackRock Inc's, according to Bloomberg terminal.

"We opening significant positions since degree of confidence is high " - said Head of Pimco Financial Research in London Philippe Bodereau. According to him, many of risks of AT1 bonds and senior bonds of Deutsche Bank, volume of which amounted to $ 4.5 billion, are exaggerated, and this can be attributed to high yield on the securities compared to debt of non-financial companies.

Pimco believes that problems with weaker European banks will not extend to the financial system as a whole, and riskiest bank bonds will be "safe haven" even if the market situation will deteriorate. Other investors do not dare to flirt with such bonds after the papers and related assets fell by more than 10 percent at the beginning of the year. Then, investors were worried with financial results of banks and regulators have had questions about how conditionally convertible bonds would behave during the crisis.