Gross tells Total Return sailors 'don't panic,' but fund floundering

The Pimco Total Return Fund, the world's largest mutual fund, capped off the second quarter's bond beat down with its worst month ever. The $268 billion Total Return Fund, run by Bill Gross, fell 2.57% in June, its worst monthly loss ever. The lousy performance came on the heels of a 1.9% drop in May. For the quarter, the fund dropped 3.7%. That put it behind 95% of intermediate-term-bond funds, according to Morningstar Inc. Customers have responded to the red ink by rushing to the exits. Indeed, investors pulled approximately $9.9 billion in June from Pacific Investment Management Co. LLC's flagship fund — the largest monthly outflows in the fund's 26 year history. Mike Reid, a spokesman for the company, declined to comment on the investor exodus. In May, investors pulled $1.3 billion from the fund, the first monthly outflows since December 2011. The poor performance and the investor freakout were caused by fears that the Federal Reserve will slow down its asset-purchasing program this year and end it entirely in 2014. Those fears led to interest rates jumping nearly 100 basis points from May to the end of June. To be sure, Pimco isn't alone in being left by interest-rate-wary investors. Bond mutual funds and exchange-traded funds saw $62 billion in outflows through the first three weeks of June, according to research firm TrimTabs Investment Research Inc. That's $20 billion more than the previous record for monthly bond fund withdrawals, which occurred in October 2008. The withdrawals wiped out over half of the $115 billion deposited into bond funds through the first five months of the year. Mr. Gross has urged investors to stay calm. In his most recent investment outlook — in which he compared the bond market to a sinking ship — he listed three reasons to remain optimistic about bonds. The Fed's forecast of the economy, he wrote, is far too optimistic. He added that inflation is way off target and that bond yields have over-adjusted. In his monthly letter, the bond king wrote: “Sailors, don't panic. And like wikiHow suggests, if you see someone that's afraid, 'yell at them!' Yell, 'This ship's going to make it to port,' Fed, Pimco and Pimco co-captains willing. Those icy Atlantic money market waters are likely to be with us for a long, long time. Have a cocktail, tell the band to stop playing dirges, because you're gonna be just fine with Pimco at the helm.'”