In August 2013, Pimco's Bill Gross declared that Pimco would win the war on bonds. His choice of metaphor said more than he intended, I think, and indicates the state of mind he had been working with for some time.
In the same Reuters article, he was also quoted as admitting that he was wrong about equities. Since I had pointed out his mistake a year earlier in Vorpal Trade, this caught my attention:
Gross, in an interview with cable television network CNBC on Thursday, said investors can still expect returns of 2 to 4 percent from bonds. But he said Pimco "made a mistake" in suggesting that returns from stocks will be limited to between 3 and 5 percent. The S&P 500 has risen more than 19 percent this year.
By the end of 2013 some small- and mid-cap mutual funds had, in fact, returned more than 38 percent for calendar 2013, and even more since Gross' declaration in August 2012 that investment returns of more than three percent was theft by equity holders. (Actually, he called it "skimming", but the intent of his statement was to say that it was a purloined gain, taken from bond holders.)
Perhaps someone was not changing their mind. The pressure and stress resulting from his recent departure from Pimco indicate that he generally has stuck to the same beliefs he held in August 2012. In the interim, there was a lot of pain for holders of the Pimco Total Return Fund, especially when measured against broader investment benchmarks.
Monday, September 29, 2014
Bill Gross' 3:00 a.m. Nightmare
Anyone who read our August 2012 article about the early morning nightmare awakening of a certain legendary investor would not be surprised. Once bond yields hit bottom, the resulting temper tantrums and disassembling of the PIMCO investor's reputation were inevitable. You can read about it at WSJ, Bloomberg, or Reuters, among other places.
Bill Gross, after being a jerk to a number of fellow employees, both in person over an extended period, and more recently in a widely read internal email, quit PIMCO before he could be fired by the board of directors. He is headed to competing investment management company Janus Capital Group Inc., which is perhaps 10% of the size of PIMCO as measured by assets under management. The media has been running warm, fuzzy nostalgic retrospectives of his history in founding and running PIMCO, highlighting his past successes, and some failures. If you are a PIMCO investor, you have some choices to make. Some investors have already been moving funds from PIMCO to Janus, following Gross' move.
Here is our take on what an investor with funds in PIMCO should do:
Q: Should equity investors move funds from PIMCO to Janus?
A: No, performance of equity investments at either firm will not be affected by Gross' presence or absence at either firm. Gross has little skill in equity investing, and as his strange, earlier comments indicated and we reported in August 2012, he may not understand the equity investment business very well. If anything, equity investors with funds in Janus accounts may want to watch carefully to see if Gross is added to any of those funds, and remove money from any funds that he is handed to manage.
Q: Should debt investors move funds from PIMCO to Janus?
A: No. As we wrote in August 2012, PIMCO's long-term bond investment performance has been driven by secular long-term declines in yields, and now that interest rates are stable or rising, the prospects of out-sized gains are slim, and there is nothing Gross can do about this. This is true regardless of Gross' presence of absence, at either firm. Our point was that his "3:00 a.m. moment" is caused by an inescapable turn of the tide that he can do nothing about. Although he has apparently always been a character of some color, my take is that he is more lucky than skillful, and the colorfulness has nothing to do with PIMCO's debt investment performance.
Following Gross to PIMCO will cost you transaction fees and some degree of inconvenience in changing accounting, account numbers, and work patterns.
Even worse, Gross will be under even more pressure to perform at Janus, and therefore will have an incentive to "gun" his investing by taking on excess risk. If he wins he will look like a genius, and if he doesn't, then he won't be much worse off than he is now. On balance you will be taking excess risk in a rising interest rate environment, where junk bonds are at abnormally low yields that may not compensate for the risk of upcoming downturns in the business cycle.
Q: Doesn't PIMCO outperform its peers now, because of Gross' investment proficiency?
A: From the data I have examined, no. Recent performance has been poor. I looked at Morningstar's compilation of short-term bond funds and found that year-to-date performance for all PIMCO funds was below the average and below the median.
I would expect that Gross will take this level of performance to any new fund he manages.
PIMCO will also be challenged in many ways that will distract them from performance at their best. Large outflows will raise transaction costs by a disproportional amount, and the media attention and turmoil will distract investment managers from performing at their best in investment management.
Bill Gross, after being a jerk to a number of fellow employees, both in person over an extended period, and more recently in a widely read internal email, quit PIMCO before he could be fired by the board of directors. He is headed to competing investment management company Janus Capital Group Inc., which is perhaps 10% of the size of PIMCO as measured by assets under management. The media has been running warm, fuzzy nostalgic retrospectives of his history in founding and running PIMCO, highlighting his past successes, and some failures. If you are a PIMCO investor, you have some choices to make. Some investors have already been moving funds from PIMCO to Janus, following Gross' move.
Here is our take on what an investor with funds in PIMCO should do:
Q: Should equity investors move funds from PIMCO to Janus?
A: No, performance of equity investments at either firm will not be affected by Gross' presence or absence at either firm. Gross has little skill in equity investing, and as his strange, earlier comments indicated and we reported in August 2012, he may not understand the equity investment business very well. If anything, equity investors with funds in Janus accounts may want to watch carefully to see if Gross is added to any of those funds, and remove money from any funds that he is handed to manage.
Q: Should debt investors move funds from PIMCO to Janus?
A: No. As we wrote in August 2012, PIMCO's long-term bond investment performance has been driven by secular long-term declines in yields, and now that interest rates are stable or rising, the prospects of out-sized gains are slim, and there is nothing Gross can do about this. This is true regardless of Gross' presence of absence, at either firm. Our point was that his "3:00 a.m. moment" is caused by an inescapable turn of the tide that he can do nothing about. Although he has apparently always been a character of some color, my take is that he is more lucky than skillful, and the colorfulness has nothing to do with PIMCO's debt investment performance.
Following Gross to PIMCO will cost you transaction fees and some degree of inconvenience in changing accounting, account numbers, and work patterns.
Even worse, Gross will be under even more pressure to perform at Janus, and therefore will have an incentive to "gun" his investing by taking on excess risk. If he wins he will look like a genius, and if he doesn't, then he won't be much worse off than he is now. On balance you will be taking excess risk in a rising interest rate environment, where junk bonds are at abnormally low yields that may not compensate for the risk of upcoming downturns in the business cycle.
Q: Doesn't PIMCO outperform its peers now, because of Gross' investment proficiency?
A: From the data I have examined, no. Recent performance has been poor. I looked at Morningstar's compilation of short-term bond funds and found that year-to-date performance for all PIMCO funds was below the average and below the median.
I would expect that Gross will take this level of performance to any new fund he manages.
PIMCO will also be challenged in many ways that will distract them from performance at their best. Large outflows will raise transaction costs by a disproportional amount, and the media attention and turmoil will distract investment managers from performing at their best in investment management.
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