(Adds Pimco spokesman's comment and long-term performance)
By Jennifer Ablan
NEW YORK, April 1 (Reuters) - The Pimco Total Return Fund, the world's largest bond fund run by Pimco co-founder Bill Gross, trailed 95 percent of its peers in March, increasing the risk that more money could flee the firm's flagship fund in the wake of a management shake-up.
According to preliminary data from Morningstar on Tuesday, the $236.4 billion Pimco Total Return Fund was down 0.57 percent in March. It has returned 1.294 percent so far this year, trailing 85 percent of its fund peers.
Pimco, based in Newport Beach, California, has been under intense pressure. The firm's flagship Pimco Total Return fund has seen $5.1 billion in outflows in the first two months of 2014. March fund-flow figures are set to be released as early as Wednesday, according to Morningstar.
Meanwhile, Gross, dubbed the "Bond King," has been dealing with a public falling-out with former heir-apparent Mohamed El-Erian, who shared the co-chief investment officer title.
Morningstar senior analyst Eric Jacobson said what hurt Pimco Total Return's performance most in March was its significant overweight position in shorter debt and its underweight position in long-dated bonds.
The Barclays U.S. Treasury 20+ year Index posted returns of 0.79 percent in March alone, while the Barclays U.S. Treasury 5-7 year Index returned -0.82 percent for the same period.
"Having such short-term exposure has hurt the fund's performance relative to its peers," said Todd Rosenbluth, director of mutual fund research for S&P Capital IQ. The Total Return Fund had an effective duration of 4.71 years at the end of February, according to data on the Pimco website. (Duration is a measure of a bond's price sensitivity to yield changes.)
The Pimco Total Return Exchange-Traded Fund, an actively managed exchange-traded fund designed to mimic the strategy of the flagship mutual fund, was up 0.084 percent in March but posted outflows of $53.4 million.
That marked the 11th straight month of withdrawals from the ETF, which has $3.4 billion in assets, according to Morningstar data.
Rosenbluth said the ETF's performance in March benefited from having less exposure to mortgage-backed securities and more exposure to investment-grade corporate bonds. The Barclays U.S. MBS Index fell 0.32 percent last month, while the Barclays U.S. Corporate Investment Grade Bond Index rose 0.07 percent.
Pimco's flagship mutual fund had a 29 percent exposure to mortgages at the end of February, while the ETF had a lower exposure to mortgages at 25 percent and a higher exposure to U.S. credit at 11 percent, according to Pimco's website.
Jacobson said the Pimco Total Return portfolio began struggling in February as the fund was "very underweight U.S. investment-grade corporate bonds. That would have been a detriment given that the overall investment-grade corporate index returned 104 basis points for February, and returns were better the farther down you went in quality."
Pimco spokesman Mark Porterfield said: "It's important to compare a fund's performance with its benchmark and not just with other mutual funds, which could hold riskier and higher-yielding assets. Total Return has outperformed its index for the past six months, two, five and 10 years."
The Pimco Total Return Fund's five-year and 10-year annualized returns of 6.87 percent and 5.89 percent have outperformed the benchmark Barclays U.S. Aggregate Bond Index by 2.07 percentage points and 1.42 percentage points, respectively, according to Morningstar data, as of March 31.
Pimco, a unit of European financial services company Allianz SE, had $1.91 trillion in assets under management as of Dec. 31.
(Additional reporting by Sam Forgione; Editing by Chizu Nomiyama, Jeffrey Benkoe and Paul Simao)