Bill Gross is a bond market superstar: After 40 years of navigating his way through the fixed income universe and generating top-tier returns for his investors, he remains Morningstar’s reigning “bond fund manager of the decade.” The problem? His flagship Pimco Total Return fund (PTTAX), the world’s largest mutual fund, is bleeding assets at a rate that might prompt an onlooker to summon a resuscitation team.
As investors focused on just when the Federal Reserve would start pulling back on its $85 billion a month in bond purchases, the Total Return fund has shrunk by $41 billion over the last four months. Of that, $15 billion has been in the form of outright losses as a result of Gross’s strategy. Reacting to those losses, investors yanked a total of $26 billion out of the fund, bringing its assets down 14 percent to only $251 billion by the end of last month. Nor are all those withdrawn assets simply shifting into other funds run by the Newport Beach, California-based Pimco, but leaving for what investors believe may be greener pastures.
This is a dramatic change from last year, when anyone screening the Morningstar universe for best performing funds would find Pimco’s and Gross’s names pop up frequently. Last year, for example, the Total Return fund returned 9.12 percent, more than double the 4.21 percent gain on the part of the Barclays Aggregate bond index that serves as the benchmark for such funds. Back in 2008, it was one of the only places where an investor could have parked their assets and generated a positive return for the year: The Total Return fund ended 2008 with a gain of 3.54 percent, beating rival bond funds in the same category by more than eight full percentage points.
Has Gross lost his mojo? It’s a reasonable question to ask, given the performance. But the problem – if there is one – may be a much simpler one: a mismatch between the kind of consistent outperformance that investors want and Gross’s view of the market and the emerging realities. “A lot of people had been using this fund as an alpha generator, expecting it to produce outperformance” in all kinds of market environments, says Morningstar analyst Mike Rawson.
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Gross’s investment philosophy, as spelled out in his monthly letters to Pimco investors, has always been long term in nature. It also has been the result of thinking that is analytically rigorous. If he ends up misjudging where the market is heading on a short-term basis, it’s either because that move is indeed only a short-term one or because something new is creeping into the picture that hasn’t previously been factored into his scenario analyses. That’s why during five- or ten-year periods when the Total Return fund has had disappointing results in one or two years, the overall results have left Gross still looking like a star.
Of course, as the mutual fund industry constantly reminds us, past performance is no guarantee of future results. As Morningstar’s bond fund analysts have pointed out in recent months, Gross and Pimco have been making more macro kinds of bets – the kind that when they go wrong, can knock a fund off kilter. As of April, Gross had a 12 percent stake in Treasury Inflation Protected Securities, or TIPS, inflation-protected bonds that haven’t performed well because, although rates have risen, it hasn’t been because of inflation. Add to that a hefty allocation to emerging market fixed income – also an underperforming part of the bond universe – and it’s hardly surprising that Pimco Total Return found itself in the bottom decile of Morningstar’s bond fund universe by midyear. Or that, in the words of Morningstar’s Rawson, “outflows have been pretty phenomenal.”
Anyone who expects Gross to focus on short-term outperformance in times of transition or uncertainty clearly hasn’t been reading his monthly letters. As these things go, they are at once very accessible – full of easily grasped analogies and jargon-free comments – and replete with sophisticated analyses. What they reveal is that Gross is well aware of the challenge that he and other fixed income managers confront heading into a new kind of battle, which he compared in early August to the Somme (a World War I battle in which generals deployed their troops as if they were fighting a Napoleonic-era war before the invention of nasty little things like barbed wire and machine guns, and suffered hundreds of thousands of casualties in the first day of the battle alone). “Bonds have suffered a near Somme-like defeat,” he wrote. But, Gross added, “we have spent months – indeed years – preparing for this new dawn.” Pimco’s investors will be “surviving veterans of this battle, not casualties.”
Gross’ September commentary, published Thursday, clarifies just why he remains committed to his controversial bet on TIPS and his long-term expectation of accelerating inflation. “In an unstable global economy that is increasingly difficult to stabilize, an investor should seek out the most stable of assets,” he wrote.
While Gross waits for the world to wake up to what he sees, the easy response for investors is to roll their eyes and bolt for the exit. For the majority of investors and many bond fund managers, the rational thought process may be something along the lines of, “who cares what happens in two years’ time; we have to get through the third quarter.” If the reason that you have invested in Pimco Total Return, or any other bond fund, is the quest for short-term returns, this is a perfectly logical response. That’s not to denigrate the quest for short-term returns: After all, many of us have time horizons that are far shorter than those of institutional investors or a mutual fund manager. We may not have the time or the appetite for increased risk it might take to regain those short-term losses.
As I wrote here in June, market gurus like Gross are not infallible so following them blindly is bound to result in disappointment, or even disaster. Even if you leave Pimco Total Return, though, it’s worth keeping an eye on what Gross is writing and saying, and trying to look at the world through his analytical lens. And you may want to ensure that Pimco Total Return (or some of the firm’s other funds, like Pimco Unconstrained Bond Fund (PUBAX) or Pimco Income Fund (PONAX), both of which have seen strong inflows) stay on your financial advisor’s platform. Because while Pimco Total Return may be in the doldrums, Gross hasn’t necessarily lost his long-term analytical faculties. And history has shown that in one way or another, those faculties are a source of long-term outperformance for investors.
