Bloomberg News

Pimco to Open Active ETF Focused on Inflation-Linked Debt

April 24, 2012

Bill Gross, co-chief investment officer of Pacific Investment Management Co. Photographer: Scott Eells/Bloomberg

Bill Gross, co-chief investment officer of Pacific Investment Management Co. Photographer: Scott Eells/Bloomberg

Pacific Investment Management Co. next week will start an actively managed exchange-traded fund that invests in global inflation-linked government bonds denominated in local currencies.

The Global Advantage Inflation-Linked Bond Strategy Fund, set to begin trading May 1 under the ticker symbol ILB, will have about 70 percent of the portfolio in developed markets and about 30 percent in emerging markets, Mihir Worah, a managing director and head of Pimco’s real return portfolio management team, said in a telephone interview yesterday.

“The inflation in bond markets are somewhat inefficient, which gives a fair amount of opportunity to active managers to outperform,” Worah said. Pimco decided to create the fund now because of low interest rates in developed markets as a result of central-bank policies, as well as higher inflation in emerging countries because of commodity prices, Worah said.

The new inflation-linked fund will be Newport Beach, California-based Pimco’s sixth actively managed ETF as the firm pushes into new products. Last month, Pimco opened an active ETF version of Bill Gross’s $252 billion Total Return Fund, which became the world’s largest mutual fund in 2009. The Pimco Total Return ETF has $509 million in assets, according to data compiled by Bloomberg. It has returned 3.3 percent from its March 1 trading debut through yesterday, compared with 1.3 percent for the Total Return mutual fund.

The new ETF will reflect Pimco’s Global Advantage Inflation-Linked Bond Index, which weights countries according to gross domestic product instead of market capitalization. The traditional practice of using market value in fixed-income indexes results in larger allocations to countries that have issued the most debt, according to Worah.

Passive Dominance

Active ETFs, which are designed to blend the trading flexibility and accessibility of ETFs with the stock- or bond- picking ability of active management, haven’t attracted much investor interest. They accounted for less than 0.5 percent of the $1.06 trillion in U.S.-registered ETF assets as of Feb. 29, according to the Investment Company Institute.

Pimco, which has about $1.77 trillion in assets under management, is a unit of insurer Allianz SE. (ALV) Pimco, known for its bond funds run by Gross, began expanding into other asset classes including stocks more than two years ago. The firm has said it will pursue strategies with a global focus, in line with its “new normal” philosophy that describes an era of lower returns, heightened government regulation, diminishing U.S. clout in the world economy and a bigger role for developing nations.

Seed Capital

The inflation-linked ETF will start with seed money of about $5 million to $10 million, according to Worah. The fund will try to beat the average real yield of about 1.45 percent for the Global Advantage Inflation-Linked Bond Index, he said. Pimco doesn’t have a comparable mutual fund in the U.S., Worah said. The firm started one last year in Europe.

The fund’s primary benchmark is listed as a Barclays index for regulatory purposes.

ETFs typically hold baskets of securities while trading throughout the day like stocks, instead of being priced once a day like most mutual funds.

Active versions seek to combine the skill of fund managers in selecting securities with the lower fees, market trading and tax advantages of ETFs. Passive products, which seek to closely track broad market benchmarks such as the Standard & Poor’s 500 Index, dominate the business.

To contact the reporter on this story: Alexis Leondis in New York at aleondis@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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