By Sam Forgione
NEW YORK, Oct 9 (Reuters) - The Pimco Total Return Fund, the world's largest mutual fund, cut its mortgage holdings in September while notching its best performance in over a year, data from the firm's website showed on Wednesday.
The fund, which has $250 billion and is run by Pimco co-founder and co-chief investment officer Bill Gross, showed a decrease in its mortgage holdings to 35 percent, down slightly from 36 percent in August.
The fund's investment strategy is important because Pimco manages roughly $1.97 trillion and is one of the world's largest bond managers. Gross and co-chief investment officer and chief executive Mohamed El-Erian's views also influence other investors because of the firm's size in the marketplace.
The fund left its holdings of U.S. government-related securities unchanged at 35 percent in September. Pimco said on its website that its holdings of U.S. government-related securities may include assets such as nominal and inflation-protected Treasuries.
The fund increased its exposure to non-U.S. developed market securities to 4 percent in September from 2 percent in August, and trimmed its exposure to money market and net cash equivalents to 6 percent from 7 percent.
Pimco defines money market and net cash equivalents as liquid investment grade securities with durations of less than one year. The fund also left unchanged its holdings of U.S. credit at 9 percent, emerging markets at 6 percent, and other securities at 5 percent.
The firm said that its U.S. credit holdings may include both high-yield and investment-grade securities, while "other" securities may include municipals bonds, convertible bonds, preferreds, and yankee bonds.
Gross's fund rose 1.8 percent last month, marking its best performance since January 2012, according to Morningstar data, following the Federal Reserve's decision to keep its monthly bond-buying program unchanged.
Bond prices recovered in September after the Fed said on Sept. 18 that it would maintain its $85 billion in monthly purchases of Treasuries and agency mortgages. The central bank said it would await evidence of stronger economic growth before adjusting the pace of its purchases.
The yield on the benchmark 10-year U.S. Treasury note plunged 17 basis points following the Fed's decision and ended the month at 2.62 percent. Bond yields move inversely to their prices. The Barclays U.S. Treasury Index gained 0.7 percent in September after falling 0.49 percent in August.
The fund benefited from the increase in Treasury prices, given its 35 percent exposure to U.S. government-related securities. The fund also likely benefited from a recovery in mortgage bond prices, as the Barclays U.S. Mortgage Backed Securities Index rose 1.41 percent in September.
In recent letters to investors, Gross has recommended buying Treasury Inflation-Protected Securities (TIPS) on expectations that the Fed's easy money policies will spur inflation, and shorter-dated bonds on the basis that the Fed's policy rate will remain low for the foreseeable future.
The Fed has held its overnight funds rate between zero and 0.25 percent since December 2008 and has more than tripled its balance sheet to around $3.7 trillion in an effort to pull the U.S. economy out of recession and spur stronger economic growth.
The Barclays U.S. TIPS Index is down 6.81 percent so far this year, despite reversing losses and gaining 1.45 percent in September.
Gross told cable television network CNBC on Wednesday that he still favors short-term Treasuries in Pimco's non-money market funds, even as Fidelity Investments has said that its money market funds do not own any securities issued by the U.S. Treasury that mature in late October or early November [ID: nL1N0HY1JF].
"We're doing just the opposite, actually probably buying what Fidelity is selling," Gross said in reference to Fidelity's move. He said that, while a potential U.S. default on its debt in coming weeks poses a risk to money market funds, it is not an issue for bond funds "outside of the money market space."
Investors have pulled $31.5 billion out of Gross's flagship bond fund over the past five months, according to Morningstar data. Other Pimco funds have seen better demand. For example, the Pimco Short-Term Fund attracted about $2.5 billion over August and September, Morningstar data show.
The Newport Beach, California-based Pacific Investment Management Co. is a unit of European financial services company Allianz SE.