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Even the best Bond Fund Manager invest in Lehman Bond

Asian investors are angry with losses tied up in complex structured products arranged by Lehman Brothers, the collapsed US investment bank.  In total there are about 50,000 people in Asian countries including Singapore, Hong Kong and Taiwan, to have been affected by Lehman’s minibonds.

Lehman bonds were widely held by investors such as pension funds and mutual funds.  But you would be surprised to learn that even the best bond fund manager, Bill Gross, also invested into Lehman Brother’s bond and it is the largest investor.  Mutual fund companies’ filings show they hold more than $143 billion worth of bonds, led by Pacific Investment Management Co (PIMCO), manager of the world’s biggest bond fund and Vanguard, according to data compiled by Bloomberg as of 30 June.

PIMCO holds Lehman bonds in at least 12 of its funds, including the $134 billion Total Return fund.  Bloomberg data showed that Bill Gross, Manager of the Total Return Fund, and co-chief Investment Officer of PIMCO, was buying Lehman bonds as recently as June.  While Gross may have lost on Lehman investments, he gained from those in Fannie Mae and Freddie Mac.  His Total Return Fund made a $1.7 billion gain after the US government seized control of the two mortgage-finance companies.  The fund’s assets rose 1.3% to more than $134 billion on 8 Sept.  It has returned 4.19% this year, beating 98% of similar funds.

Once again, the moral of the story is it pays to diversify.  The truth is you don’t know when the pig might fly.

Reference:

  1. Financial Times, Justine Lau, 2008-09-23, “Hong Kong Retail Investors Stage Protests
  2. Financial Times, Nicole Bullock, 2008-09-22, “Lehman bondholders could lose $110 bn
  3. John Glover, Bloomber, Pimco, Vanguard are biggest Lehman bond fund losers, 20080923
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