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Bill Gross, is known as the Bond King to a generation of investors. And with good reason, under his management PIMCO Total Return has amassed over $229 billion in assets under management. But after more than 40 years at the top, there are signs of a few cracks appearing in his amour.
First there was the high profile walkout of his chief lieutenant, Mohamed El-Erian. Then rumors began to circulate about Gross’s confrontational management style. None of which would have mattered, were it not for the fact that PIMCO’s performance has fallen off a cliff.
Gross’s $229bn Pimco Total Return bond fund, has plunged down the league tables as rates confounded the consensus and fell sharply. Placing PIMCO in 76th place out of 100 core bond funds for 2014 so far, according to Morningstar data.
Such performance has not gone unnoticed by investors who have been abandoning the bond giant in droves. Over the past 13 months investors have drained almost $60bn from the fund.
All of this calls into question the validity of Gross’s bond king crown. But one thing is for sure, he’s not going to go down without a fight, in fact he’s already drawing the battle lines. Boisterously claiming (in a Bloomberg Radio interview) that he will soon put “fear on competitors’ faces again”.
So if battle lines are being drawn, who are the top three contenders for the bond king crown?
1. Jeff Gundlach – Gundlach, head of the DoubleLine Total Return fund, needs no introduction to LearnBonds readers. His fund has performed in the top one-third of its class – good, if not stellar – and Mr Gundlach is parlaying his positive headlines into new products through which he hopes to substantially increase DoubeLine’s assets under management, which sat at $47bn last year to Pimco’s $2tn.
There is to be a new “unconstrained” fund that will give him freer rein to make wider bets in the global fixed income markets, and an exchange traded fund designed to rival the Pimco Total Return ETF, both of which will mimic the positions of their flagship mutual funds.
2. Rick Rieder – As Chief investment officer for BlackRock Inc. (BLK)’s actively managed bond funds. Rieder is well placed to steal the crown from under Gundlach’s nose.
At a time when most bond managers, including Pimco, have been suffering redemptions, BlackRock’s last quarter attracted $7.2 billion into its active fixed-income funds.
Rieder’s $9.6 billion Strategic Income fund is attracting money as expectations that the three-decade rally in bonds may have ended drive investors into non-traditional strategies. His performance helped the firm’s fixed-income lineup beat 61 percent of peers in 2012 and 57 percent this year through September, according to Morningstar Inc.
3. Dan Fuss – At 80 Fuss, vice chairman of Loomis Sayles & Co., is even older than Gross. But despite his advancing years, his $18.5 billion Natixis Loomis Sayles Strategic Income Fund and the $24.0 billion Loomis Sayles Bond Fund have both returned more than 125 percent over the past 10 years, ranking first and second among 65 bond funds with more than $5 billion in assets that have been in existence for at least 10 years, according to data compiled by Bloomberg.
All of the above have some work to do, if they want to topple Gross. If you add up the AUM of all the above mentioned funds, you still don’t get anything like the amount Gross has under management.
So realistically, there needs to be a cataclysmic change in investor behavior before Gross is unseated.
Todays Other Top Stories
LearnBonds: – Three must-buy high dividend stocks. – There are rare occasions when what tastes really good is actual good for you. The reason: the underlying business model is sound. The thing is, they’re not easy to find, and you have to know what you’re looking at. I spend a good amount of my time hunting for these treats, and I want to bring to your attention three choice morsels I’ve found with high but sustainable yields.
Bond Buyer: – Muted supply puts strain on reinvestment season. – With municipal bond supply down by nearly a quarter from last year, investors have been coming up short as they try to roll over the proceeds from June 1 and July 1 called and maturing bonds, municipal managers and strategists said.
Barron’s: – Muni funds notch sixth straight weekly inflow. – Municipal bond mutual funds and exchange-traded funds posted a sixth consecutive weekly net inflow, per Lipper data. The latest inflow measured a moderate $307 million, up from $192 million the prior week, but trimming the four-week moving average to $449 million from $714 million a week ago.
Bloomberg: – Pittsburgh rebirth tainted as pension fuels deficit. – The fiscal rebound of Pittsburgh, the former steel-city capital that shed a Rust-Belt fate by rebuilding its economy around universities and hospitals, has struck an obstacle that’s bedeviling municipalities nationwide.
Businessweek: – Munis set for longest slide since March after debt offers mount. – The $3.7 trillion municipal market is headed for the longest losing streak since March after localities offered the most bonds in three months.
Morningstar: – The straight dope on the yield curve. – The rate at which yields rise with maturities can be a key issue for bond investors.
Investors.com: – Performance rotation among global fixed income sectors. – From 2009 through the middle of 2013, fixed income investing turned out to be fairly straightforward. The more credit risk and interest rate risk investors assumed in their portfolio, the higher their returns. In the second half of last year, interest rates rose and emerging markets fell out of favor. So far in 2014, falling interest rates have boosted longer-maturity bonds.
Businessweek: – Left-for-dead sugar bonds surge 84% for world’s best gain. – Four months after Grupo Virgolino de Oliveira SA’s notes hit a record low as investors braced for a wave of defaults in Brazil’s sugar industry, they’re proving to be the most-lucrative junk-bond investment in the world.
WSJ: – U.S. Government bonds rise. – Investors piled into Treasury bonds for safety on Thursday amid escalating violence in Iraq and disappointing U.S. economic releases.
High Yield Bonds
S&P Capital IQ: – High yield bond funds see $277M cash inflow despite ETFs. – Retail-cash inflows for high-yield funds totaled $277 million in the week ended June 11, according to Lipper. The figure represents an inflow of $437 million to mutual funds that was dented by a $160 million withdrawal from the exchange-traded-fund segment.
Markit: – Most Expensive U.S. Corporate Bonds. – Four of the top twenty most expensive U.S. corporate bonds to borrow were issued by the international mining and natural resource company, Cliffs Natural Resources.
MarketWatch: – Men’s Wearhouse junk bonds offer no bargains. – The jokes were easy come by, but a debt sale by Men’s Wearhouse wasn’t offering any two-for-one deals to yield-hungry bond investors.
Tim McAleenan Jr: – A 5% junk bond bubble: What could possibly go wrong? – In rare situations, it actually is better to sell off the stock of companies you own rather than try and live off the income. For those of you who pay attention to market history, you know that we are living in one of the worst times of high-yield American bonds with junk status that we have ever witnessed.
ValueWalk: – The case for non-investment grade debt: Artisan Partners. – Artisan argues that high yield bonds and leveraged loans aren’t subject to the same interest rate risks as government debt.
Businessweek: – Milken protege’s bearish bond call lost on Wall Streeters. – It’s easy to hate junk bonds paying yields that are the lowest ever. But Wall Street’s biggest banks are undaunted.
Money Marketing: – Emerging markets return to favour with European investors. – Investors across Europe channelled money in emerging market funds during April in signs that the unloved asset class is coming back into favour.
MoneyBeat: – Forget Europe, emerging markets to gain most from ECB easing. – The European Central Bank has given investors an excuse to keep buying in emerging markets into the second half of the year, as a worldwide “hunt for yield” runs out of assets to buy in advanced economies.
Reuters: – ECB triggers explosive rise in emerging market euro borrowing. – Emerging market bond sellers and European funds are both revelling in an explosive rise in euro debt sales that offer cheap cash to borrowers while providing investors with higher yields than anywhere in the euro zone.
Business Insider: – Investors are betting a meteor won’t destroy America. – The search for yield has taken investors into the nether regions of the solar system. Last month, according to Artemis, a group that tracks catastrophe bonds, insurer USAA took out a policy against the risk it would have to pay out for tropical cyclones, earthquakes, severe thunderstorms, winter storms, wildfire, volcanic eruption and meteorite impact.
Kiplinger: – The four best bond funds to own now. – Bond yields have nowhere to go but up, and that means bond prices will fall. These funds take unconventional approaches to avoiding losses and boosting returns.
Businessweek: – Bond bulls have summer on their side as June jinx fades. – Bond buyers seem awfully concerned nowadays about earning too little from their investments. They appear to be less bothered about traditional notions of safety and danger.
Morningstar: – The right reason to buy into Vanguard’s classic dividend strategy. – Don’t buy it for its dividends or perceived safety; buy it because you think value and quality strategies work.
Randy Durig: – Short-term fixed income portfolio yields over 9.8%? This 1-year review screams yes. – High-yield averages for additions to the combined FX2 portfolio are over 9.8%. The average remaining maturity of these issues is about 3 years, 4 months. The average yield for additions to the U.S. dollar only portfolio (FX1) were about 10.25%.
Reuters: – Bond ETFs swell in size and risk as institutions pile in. – Institutional investors having trouble finding bonds for their portfolios from the usual suppliers are accepting a higher degree of risk and pumping billions of dollars into exchange-traded bond funds, boosting asset management firms such as BlackRock, PIMCO and State Street.
Mather, Deputy CIO: Brazil attracting more than soccer fans, don’t find yourself “offside.” Get Real by going long BRL and local rates.
— PIMCO (@PIMCO) June 13, 2014
Divining what Puerto Rico’s deficit is for 2014 and for 2015 which starts July 1 is very difficult given delayed tax collections #muniland
— Cate Long (@cate_long) June 13, 2014
Crescenzi: FOMC preview: Unemployment drop & faster inflation sustain rate hike timeline, but neutral policy rate view to move lower soon.
— PIMCO (@PIMCO) June 13, 2014