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Pimco's Gross says returns on risk assets depend on Fed

By Sam Forgione

NEW YORK (Reuters) - Pimco's Bill Gross, manager of the world's largest bond fund, said Tuesday that risk assets such as stocks and high-yield bonds will outperform this year if the U.S. Federal Reserve and other central banks can convince investors that easy money policies are stimulating growth.

"If global central bankers can convince investors that their abnormal policies can recreate a semblance of the old normal economy, then risk assets at the outer edges of our circle will have higher future returns than otherwise," Gross said in his monthly letter to investors, titled "The Second Coming."

Gross, co-founder and co-chief investment officer at Pimco, said risk assets are "not necessarily mispriced" despite central banks' easy money policies that have kept interest rates artificially low.

Gross said the Fed - which has kept its benchmark short-term borrowing rate, the Fed Funds rate, near zero since late 2008 and bought trillions of dollars in bonds to help stimulate the economy - will need to sway investors that its recent push for more "qualitative" guidance is effective.

Gross cited comments from St. Louis Fed President James Bullard, who said in mid-February that he expected the Fed to drop its economic thresholds and have to "make more qualitative judgments" on when to tighten policy.

Gross cautioned investors to "longer-term consequences," however, and said that liquidity in corporate bonds will be "challenged" as the Fed winds down its quantitative easing.

Gross's flagship Pimco Total Return Fund posted $1.6 billion in outflows in February, reducing the fund's assets to $236 billion, according to data from Morningstar. That marked the fund's 10th straight month of outflows. The fund posted a record $41.1 billion in outflows last year.

The fund rose just 0.52 percent last month, trailing 71 percent of its peers, according to preliminary Morningstar data. It also slightly trailed the 0.53 percent gain of the benchmark Barclays U.S. Aggregate bond index.

The Pimco Total Return Exchange-Traded Fund , an actively-managed ETF designed to mimic the strategy of the flagship mutual fund, posted February outflows of $42.6 million. That also marked the 10th straight month of withdrawals from the ETF, which has roughly $3.5 billion in assets, according to Morningstar.

Investors pulled a total of $2.5 billion from Pimco's U.S. open-end mutual funds in February, the ninth consecutive month of outflows from the funds. While Pimco posted outflows, DoubleLine and another competitor, Loomis Sayles, attracted inflows last month, according to Morningstar data.

DoubleLine attracted $194 million in new cash across its U.S. open-ended mutual funds last month, the firm's first inflows in nine months. Los Angeles-based DoubleLine had over $47 billion in assets as of December 31, according to its website.

The DoubleLine Total Return Bond Fund , run by Jeffrey Gundlach, attracted $210.5 million in new cash last month, bringing fund assets to $31.4 billion.

Loomis Sayles, where closely-watched money manager Dan Fuss serves as vice chairman, attracted a slight $80.4 million to its U.S. open-end mutual funds in February. The firm had $199.8 billion in assets as of December 31, according to its website.

Pacific Investment Management Co, a unit of European financial services company Allianz SE , had $1.91 trillion in assets as of December 31, according to its website.

(Reporting by Sam Forgione; Editing by Chizu Nomiyama and Nick Zieminski)

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