Bill Gross of Newport Beach-based Pimco Funds has been putting his money where his mouth is.
Gross, chief investment officer at Pimco and manager of the world's largest bond fund, spent more than $5 million of his own money to buy shares of so-called closed-end municipal bond funds in the fourth quarter, joining portfolio managers at other fund companies who have made similar purchases to take advantage of share prices that fell below the funds' net asset value.
Gross, manager of the Pimco Total Return bond fund, bought into closed-end Pimco muni funds starting in October, according to regulatory filings.
Portfolio managers and directors including Philip Condon, who oversees the Scudder fund group, likewise have been buying shares in muni funds run by their employers, as have those at Alliance Capital Management and Eaton Vance Corp.
Unlike open-ended mutual funds, closed-end funds trade on stock exchanges. The value of their shares can diverge from the true market value of the portfolio, trading either at a premium or a discount.
At year-end, "a lot of the closed-end muni funds dropped off in value, probably as a result of tax-loss selling that was going on" by investors, said Robert MacIntosh, chief economist at Eaton Vance. "It's created a pretty big discount to net asset value."
Gross purchased 200,000 shares in the Pimco Municipal Income Fund III between Dec. 16 and Dec. 26, according to data filed with the Securities and Exchange Commission.
During that period, the fund traded at a discount to net asset value. On Dec. 17, for example, investors could have purchased Pimco Municipal III shares for $14.01 each, even though the fund had a net asset value of $14.36 a share.
In contrast, investors had to pay a premium several weeks earlier to invest in Pimco Municipal III. On Dec. 2, the fund's shares traded at $15 each, about 5.5% more than its net asset value of $14.22 a share.
On Tuesday the fund was trading at $14.50 a share. It is again trading at a premium to net asset value.
Gross said the discount to net asset value was one of several reasons -- others being yield and the quality of assets -- for his decision to invest in the muni funds. He also said these funds, by using borrowed money to acquire bonds, have brought their yields close to 7%.
"As long as the economy has a whiff of deflation and the Fed stays low" on interest rates, "these funds should be super performers, especially when compared to pretax equivalent bonds or perhaps even tax-free dividend stocks," Gross said.