(Bloomberg) -- The plunge in oil prices has claimed another prominent victim.
Bill Grosss $1.46 billion Janus Global Unconstrained Bond Fund trailed its benchmark in the fourth quarter of last year primarily because it had plowed about 5% of net assets into debt issued by U.S., Russian and Brazilian energy companies, according to a quarterly overview published on the Denver-based firms website. Those bonds and emerging market sovereign debt that Gross agreed to insure were all hit by the 42% collapse in crude prices during the period.
Energy sector exposure detracted the most from the funds performance, Janus said in the fourth-quarter commentary, adding that exposure to U.S. dollar-denominated Russian and Brazilian corporatebonds also hurt. The sharp decline in crude oil prices along with the declines of the countries currencies drove underperformance here.
The commentary provides the first detailed insight into how Gross used his flexibility to navigate markets in running the Janus fund, which can invest across bonds worldwide and seeks to outperform the three-month London Interbank Offered Rate, or Libor. Before joining Janus, Gross was best known as manager of the Pimco Total Return Bond Fund, a traditional fund benchmarked to the Barclays US Aggregate Index.
Janus Unconstrained declined 0.56% during the fourth quarter after including dividends, compared with the 0.06% return of the three-month Libor. Pimco Total Return advanced 1.32% in the same period, as the Barclays US Aggregate index rose 1.79%. Gross on Sept. 26 announced his departure from Pacific Investment Management Co., which he co-founded and led for more than four decades.
During the fourth quarter, Gross invested about 2.5% of net assets in debt issued by U.S. energycompanies such as Marathon Petroleum Corp., Transocean Inc., Sabine Pass and Kinder Morgan Finance Co. As of Dec. 31, another 2.4% of assets were invested in dollar-denominated debt issued by Russian and Brazilian energy companies, including Petroleo Brasileiro, Gazprom, Lukoil, and Rosneft.
Under Gross, Pimco Total Return also held investments in some of these same companies, including Gazprom and Petrobras. although in smaller proportions. The fair value of these holdings, about $2.2 billion as of Sept. 30, equaled just 1.1% of Pimco Total Returns net assets as of Sept. 30, according to regulatory filings.
The Janus fund also suffered from agreements to provide third parties with insurance against default of government debt issued by Russia, Brazil, China and Mexico, a bet that equaled about 5.4% of net assets as of Dec. 31, according to data from Janus. All of these countries with the exception of China are major oil producers, and Russia and Mexico both rely on crude sales to help fundgovernment spending.
Janus Unconstrained sold this insurance, in the form of derivative contracts known as credit default swaps, in part because it tends to be overpriced, the firm said in the commentary. The move proved to be a money-loser during the fourth quarter, as the cost of protecting Russian sovereign debt almost doubled under the weight of declining oil revenues and Western economic sanctions, while rates on Brazilian and Mexican CDS spiked in December.
Janus Unconstrained had some winners within the corporate credit sector, including holdings in media, telecommunications and technology bonds, according to the commentary. Credit default swaps that thefund wrote on U.S. financial companies also contributed slightly to fourth-quarter performance, Janus said.
The fund also benefited during the fourth quarter from selling volatility in stock, bond and foreign exchange markets by writing short-dated out-of-the money options. Heightened concerns about market volatility has led to the mispricing of these options, Janus said in the commentary, adding that the fundprimarily gained by selling volatility on Treasuries.
Other holdings at Janus Unconstrained mirrored some of the same sectors that Gross often invested in while running Pimco Total Return, including Treasury Inflation-Protected Securities, also known as TIPS. At the end of December, among the top holdings in the Janus fund was a TIPS bond that matures in 2025, which accounted for 2.64% of net assets, according to the firms website.
Janus Unconstrained also invested in funds run by Grosss old employer. The fund had 0.07% of net assets invested in the Pimco Dynamic Income Fund at the end of December, with another 0.04% devoted to the Pimco Corporate & Income Opportunity Fund and 0.01% held in the Pimco Corporate & Income Strategy Fund.
Gross managed both of the corporate and income funds while he was at Pimco, and continues to hold stock in all three closed end funds, according to regulatory filings. He has been cutting his holdings in the three funds since leaving Pimco, the filings show.
With assistance from Mary Childs in New York.
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