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As the stock market continues its two year surge and long bonds prices slump in response, the PIMCO Total Return Fund (PTTRX), which grew nearly 100% over the last ten years, appears to be receding into the background as investors jump into equity funds. Although it has recovered a portion of its 5% decline in December, it no longer sits among the leaders in its category as it has done consistently since its inception.  Some fund observers are starting to wonder if its massive size ($237 billion) is just too big to manage at a time when bonds are showing their first signs of volatility in years, raising the question, “Are PIMCO’s best days behind it?”

Its recent performance during the big Treasury slump in December raised some red flags when it recorded the second biggest decline among government bond fund managers. This spurred an outflow stampede of $2 billion that resulted in its first net withdrawal in more than two years. Of course, the biggest red flag was raised at the urging of the fund’s manager, Bill Gross, who had already indicated that long bond prices may have peaked and could fall in the face of increased Fed activity.

Before jumping the PIMCO ship, skittish investors should first rewind the tape and study the performance of the fund’s managers during several of rising rate cycles of the last 20 years. In three out of four of the extended rate hike cycles beginning back in 1988 the fund came through with positive performances

Investors who rode out those cycles were rewarded with a cumulative 8.47% return since the fund’s inception. The obvious implication here is that, patient investors should continue to benefit from the fund managers’ experience with rising rate environments, and reap the rewards of their ability to outperform most of their peers during periods immediately prior to and following rate increases.

Heeding his own warnings, Gross has been reducing his positions in U.S. government debt since the summer of 2010. His strategy, during times of economic growth, is to move towards high grade corporate bonds which tend to do well as corporate earnings increase. The fund also seeks to capitalize on the divergent interest rate cycles of foreign economies to diversify its exposure to any one rate cycle.

With a 70% position in cash and cash equivalents the fund has reduced its exposure to volatility and is poised to act on its developing strategy for the next economic cycle. In the meantime it is still paying out on a nice 3% yield which buffers any further downside.

And, for those who have concerns over its bulky size and ability to maneuver, keep in mind that it is through the fund’s financial clout that the managers are able to obtain the most favorable pricing in a vast bond universe. The buy and hold strategy of bond positions actually favors larger bond funds.

The PIMCO Total Return Fund remains a core asset for a balanced and diversified portfolio seeking stable long term growth.

Rich Best is a writer for the Mutual Fund Site. He brings more than 30 years of experience to his posts consisting of Series 7, 22, 63, 66 Licenses and executive level experience. In addition to writing about Mutual Funds, he has written about whether It is Over For Emerging Markets Funds.