The plunge in oil prices has claimed another prominent victim.

Bill Gross' $1.46 billion Janus Global Unconstrained Bond Fund trailed its benchmark in the fourth quarter of last year primarily because it had plowed about 5 percent of net assets into debt issued by US, Russian and Brazilian energy companies, according to a quarterly overview published on the Denver-based firm's website. Those bonds and emerging market sovereign debt that Gross agreed to insure were all hit by the 42 percent collapse in crude prices during the period.

"Energy sector exposure detracted the most from the fund's performance," Janus said in the fourth-quarter commentary, adding that "exposure to US dollar-denominated Russian and Brazilian corporate bonds" also hurt. "The sharp decline in crude oil prices" along with the declines of the countries' currencies "drove underperformance here".

The commentary provides the first detailed insight into how Gross used his flexibility to run the Janus fund, which can invest across bonds worldwide and seeks to outperform the three-month London Interbank Offered Rate, or Libor. Before joining Janus, Gross was best known as manager of the Pimco Total Return Bond Fund, a traditional fund benchmarked to the Barclays US Aggregate Index.

Janus Unconstrained declined 0.56 percent during the fourth quarter after including dividends, compared with the 0.06 percent return of the three-month Libor. Pimco Total Return advanced 1.32 percent in the same period, as the Barclays US Aggregate index rose 1.79 percent.

'Falling knife'

Gross' bet on energy bonds may have been premature, said Matthew Mish, a credit strategist in New York with UBS AG. Other managers of these non-traditional bond funds and hedge funds were waiting for the volatility in the crude oil prices to cool before buying.

"As of January, it was still catching a falling knife," Mish said in an interview.

Gross relied heavily on corporate bonds to boost yields and bought short-duration debt that matures in one to three years, a move designed to protect against volatility and rising interest rates. Among corporate credits, he bet mainly on "crossover" bonds, those that are rated just above or just below investment grade. Bonds issued by companies that are in the process of strengthening their balance sheets have "yet to be recognized" by investors, Janus said.

During the fourth quarter, Gross invested about 2.5 percent of net assets in debt issued by US energy companies such as Marathon Petroleum Corp, Transocean Inc, Sabine Pass LNG LP and Kinder Morgan Finance Co. As of Dec 31, another 2.4 percent of assets were invested in dollar-denominated debt issued by Russian and Brazilian energy companies, including Petroleo Brasileiro SA, Gazprom OAO, Lukoil OAO, and Rosneft OAO.

Gazprom, Petrobras

Under Gross, Pimco Total Return also held investments in some of these same companies, including Gazprom and Petrobras. although in smaller proportions. The fair value of these holdings, about $2.2 billion as of Sept 30, equaled just 1.1 percent of Pimco Total Return's net assets as of Sept 30, according to regulatory filings.

The decline in crude prices "hit major oil producing economies within emerging markets as well as their currencies, like Russia and Brazil", Janus wrote.

The Janus fund also suffered from agreements to provide third parties with insurance against default of government debt issued by Russia, Brazil, China and Mexico, a bet that equaled about 5.4 percent of net assets as of Dec 31, according to data from Janus. All of these countries with the exception of China are major oil producers, and Russia and Mexico both rely on crude sales to help fund government spending.

Janus Unconstrained sold this insurance, in the form of derivative contracts known as credit default swaps, in part because it tends to be overpriced, the firm said in the commentary. The move proved to be a money-loser during the fourth quarter, as the cost of protecting Russian sovereign debt almost doubled under the weight of declining oil revenues and Western economic sanctions, while rates on Brazilian and Mexican CDS spiked in December.

Janus Unconstrained had some winners within the corporate credit sector, including holdings in media, telecommunications and technology bonds, according to the commentary. Credit default swaps that the fund wrote on US financial companies also contributed "slightly" to fourth-quarter performance, Janus said.