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'Swap' Deals at Heart of New Pimco Funds

June 26, 2005|Tom Petruno | Times Staff Writer

Pimco's new "Main Street indexing" stock mutual funds may take a bit of work for Main Street investors to grasp.

The funds won't actually own the 1,000 individual stocks in the index developed by Robert Arnott at Research Affiliates. Instead, they will own the shares via "swap" agreements with other institutions, said Brent Harris, the chairman of Newport Beach-based Pimco Funds.

The institutions will pay the funds whatever return the index earns, if any. Pimco, in turn, will pay the institutions a rate of interest for their guarantee.

At the same time, the bulk of the money investors place in the funds will be invested in bonds. Those assets will be managed by Bill Gross, the well-known Pimco bond guru who manages the firm's Total Return fund, the world's biggest bond fund.

In effect, Harris said, the funds -- labeled Fundamental Index Plus and Fundamental Index Plus Total Return -- will have two opportunities to win, or lose. One way is via the performance of the underlying index stocks. The other is via the performance of the bond portfolios managed by Gross.

Swaps are a huge business that Pimco knows well, Harris said. The firm uses the same kind of setup for a number of other funds it has launched in recent years.

As for Arnott's index, he says it will be managed like other passive indexes: Once the initial stock list is set, it will be "rebalanced" just once a year, adding or selling shares of companies based on how they stack up according to historical sales, profit and other fundamental measures of business performance.

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