The king is dead. Long live the king!
Well, not quite. Not so fast. It’s true that Bill Gross has been dethroned: He has lost his position at Pimco, the $2 trillion investment management colossus that he founded 43 years ago, jumping before the firm’s new majority owners, Germany’s Allianz, could usher him to the door. At his new home, Janus Capital Group, he won’t be managing the hundreds of millions of dollars that he did at the helm of Pimco Total Return, whose assets peaked at $293 billion some 18 months ago.
And yes, it’s true that, technically at least, the title of King of the Bond Market has fallen vacant. And technically, at least, it has been inherited by Joshua Barrickman.
Barrickman manages — oversees might be a better word — two Vanguard Group bond index funds, the Total Bond Market Index Funds, that as of the end of September had assets of about $208.95 billion. Pimco has already estimated that outflows from Pimco Total Return hit $23.5 billion in September, bringing that fund’s assets below the $200 billion mark and crowning the Vanguard funds (which are managed using precisely the same strategy and whose performances tend to mirror each other) as the single largest group of bond funds out there.
Trailing them by a large margin are a cluster of other Vanguard funds, including the short-term index fund; a municipal bond fund; the Templeton Global Bond fund, whose assets haven’t yet broken above $100 billion; a fund from Lord Abbett; and Jeffrey Grundlach’s DoubleLine Total Return fund. Gundlach’s fund is among the beneficiaries of the Pimco outflows, but while it’s rapidly heading towards $40 billion, it still has a long way to go before hitting the heights that Gross once reigned over.
Of course, so does Gross himself.
The domain over which he will reign, the Janus Unconstrained Bond Fund, still less than six months old, had a mere $13 million in assets at the end of August. Gross’s arrival attracted a surge of inflows from investors willing to bet that the bond market wizard hadn’t lost his touch. They are focusing more on his long-term track record (beating the bond market index by more than a full percentage point over the course of his career, a phenomenal achievement) than on the dismal recent returns generated by Pimco Total Return.
So, should you order your velvet robes and prepare for Joshua Barrickman’s coronation as the new king of the bond market?
I wouldn’t be quite so hasty.
Even if Vanguard were the kind of investment firm that liked to turn its investment managers into superstars (and it isn’t; quite the contrary), Barrickman’s realm isn’t one in which bond market monarchs are made. The funds that he runs are index funds, after all, not actively managed portfolios. Barrickman’s job is to ensure that the funds are doing what they are supposed to do — that the computers are creating the portfolio that most closely mirrors the Barclays US Aggregate bond fund index.
“He is the antithesis of Bill Gross,” says Daniel Wiener, CEO of Adviser Investments, who tracks Vanguard’s funds closely. “He doesn’t choose anything. Sure, it requires expertise to track an index as broad as this, but in terms of understanding the bond market? No, that isn’t needed. You could probably get away without knowing how to spell (Federal Reserve Chair) Janet Yellen’s last name.”
So, while the Vanguard funds may dominate the landscape, the throne, for now, is vacant. And we could be about to witness a battle for its possession that would do justice to the pen of George R.R. Martin.
What does it take to be a bond market king? Well, for starters, unlike Vanguard’s Barrickman, contenders should be active managers, with a deep knowledge and understanding of how the fixed income world works. While at Pimco in Gross’s era, sheer market clout and active management converged, the bond market is more akin to the medieval monarchies of old — or the Versailles ruled over by Louis XIV, or Catherine the Great’s Russia — than it is a bloodless constitutional monarchy of today that confines its ruler to signing papers drafted by politicians.
“Sure, you want the king to have assets; to carry a big stick; but more than that you want him to have performance and to be willing to be iconoclastic — not to bow to the crowd and agree with the market,” argues Wiener, who has seen plenty of managers, active and passive, come and go. “If anything, you want them to have convictions.”
In fact, Wiener makes a case for Gross merely having abandoned his throne temporarily. “His number one goal right now is to go and prove to the world that he still has what it takes to kill it,” he says.
There’s at least a decent chance that he could fight his way back to the top of the heap. Already, while some Pimco assets are fleeing to established managers, some are finding their way to Janus. And Gross doesn’t need to have hundreds of billions of dollars. He may fare better with a few hundred million in assets, at least while he re-establishes his track record.
History has proved, over and over again, that as a fund’s assets grow, its performance suffers. Indeed, a recent study devoted to the performance of Bill Gross at Pimco Total Return and rival Jeffrey Grundlach at DoubleLine Total Return Bond fund found that every time assets doubled, the amount of alpha — or performance that can be traced to manager skill rather than to the market, or a rising tide lifting all boats — fell by 10 percent to 20 percent.
Gross still has his high public profile, even though it has been tarnished by his equally public antics and eccentric behavior, which included him comparing himself to both pop singer Justin Bieber and winning racehorse Secretariat. His biggest rival for the throne is likely to be Gundlach, whose own background is far from free of controversy. Both have strong views on the bond markets, and big platforms; both have outsize personalities. Both have a lot to prove.
The battle for the crown may now begin.
Top Reads from The Fiscal Times: