The Contrasting Fortunes of Gross and Gundlach and Today’s Other Top Stories

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Reputations are lost and made in the fund manager business on the back of returns. Take a look at Bill Gross, he has spent the last 40 years building his reputation. His flagship fund has delivered an annualized gain of nearly 8 per cent since its inception on May 11, 1987.

But recently his investing prowess has been called into question. A string of bad results caused by a flattening of the yield curve, not steepening as Gross expects. Aligned with his very public falling out with Co-Chief Executive and heir apparent Mohamed El-Erian, has caused investors to flee his flagship Total Return Fund BOND.

During April, investors pulled another $3.1 billion from PIMCO’s flagship Total Return Fund, marking the 12th consecutive month of outflows. The $3.1 billion is the same amount investors pulled from PIMCO Total Return in March and is nearly double the $1.6 billion investors pulled in February, according to Morningstar.

That goes against the general flow of the market, with U.S. bond mutual funds and exchange-traded funds actually attracting $11.2 billion new cash in April and $43.4 billion since the start of the year, according to fund tracker TrimTabs Investment Research.

And one of the biggest benefactors is, Gross’s fellow Californian, Jeff Gundlach. During April, Gundlach’s DoubleLine Total Return Bond Fund saw net inflows of $319.5 million, according to the company.

So far this year, DoubleLine Funds have seen $929 million of net inflows, the firm said. For its part, Gundlach’s flagship DoubleLine Total Return Bond Fund had about $320 million of inflows for the month, according to DoubleLine data.

In terms of assets under management Gross is still way out in front of Gundlach. Gross’s PIMCO Total Return Fund had $230 billion in AUM at end of April, down from a peak of $292.9 billion twelve months earlier. By comparison, Gundlach’s Total Return held just $32 billion.

But ironically this could be Gross’s problem. Because when it comes to mutual funds, bigger is definitely not better. Gundlach can afford to move in and out of positions much quicker than Gross can.

Ordinarily, size is less of a problem for fixed-income funds because the market for bonds is far larger than stocks, so price is less sensitive to high-volume trades. That means bond funds should be able to produce consistent returns, regardless of size. But with bond liquidity at all time lows, PIMCO’s size becomes a major factor. It could be that Gross’s best days are behind him and PIMCO will have to slim down its funds to compete in the “new normal”.


Todays Other Top Stories

Municipal Bonds

EatonVance: – Muni bonds’ appeal likely to be evident in 2014. – 2013 proved to be a difficult year for the municipal bond market with a few, high-profile negative news stories and fears that Fed actions could lead to higher interest rates. But 2014 may offer a more promising scenario. Higher tax rates, in particular, are likely to cause more investors to consider the appeal of investing in tax-advantaged bonds.

Bloomberg: – Puerto Rico’s planned budget cutting a positive, Moody’s says. – Puerto Rico Governor Alejandro Garcia Padilla’s budget plan is “very positive” for the commonwealth, a Moody’s Investors Service analyst said today.

Bloomberg: – New Jersey Turnpike Authority to sell $1 billion in debt. – The New Jersey Turnpike Authority, operator of the state’s biggest toll roads, is scheduled to sell $1 billion in bonds as soon as May 13 to fund projects on the state’s namesake roadways.

Bloomberg: – Cuomo borrowing most since 2006 shows fiscal muscle. – With New York poised for its best credit rating in four decades, Governor Andrew Cuomo is authorizing the most borrowing since 2006 as he boosts investments in schools, roads and health care.


Treasury Bonds

WSJ: – Treasury bonds rebound; 10-year yield hits 3-month low. – Treasury bonds strengthened, erasing earlier losses, as worries about growing geopolitical tensions in Ukraine prompted demand for haven assets.


Corporate Bonds

Indexology: – A Comparison of two corporate bond markets. – The possibility of interest rates remaining low means investors will continue to search for yield while also looking to diversify market exposures.  Below we offer a snapshot of two corporate bond landscapes: the U.S. corporate bond market and the Chinese corporate bond market, which has expanded rapidly in recent years.

Schwab: – Corporate bond prices: Can the strong performance continue? – We’re doubtful there’s much room for price appreciation for investment-grade corporate bonds in the months ahead—but we still think they can outperform Treasuries.


High Yield Bonds

Wall St Daily: – Credit markets flashing danger signs. – Demand for junk bonds is soaring, as persistently low rates boost the appeal of higher-yielding (and riskier) debt. Another disturbing trend is the rise in covenant-lite loan issuance. Regular, high-yield loans force borrowers to maintain their debt below certain ratios of cash flow, but covenant-lite loans come with less stringent restrictions.

Invesco: – Why high yield investors should look past high dollar prices. – Conventional wisdom says if bonds are trading at a discount to par value, buy. If they are trading over par value, don’t. Over the past three years, the high yield market has experienced above-par prices, leading some investors to avoid the asset class. However, high yield bonds don’t always perform according to conventional wisdom. They include call protection, which may generate returns for investors even when the market is trading above par.

Forbes: – High yield bond issuance hits 7-month high of $39B. – The U.S. high yield bond market continued to roll in April, posting $38.8 billion in issuance, the most in a month since the record $47.6 billion in September 2013. So far in 2014 there has been $113.8 billion in issuance, slightly behind the $115.3 billion seen during the first four months of 2013. There was a near-record $322.3 million in high yield issuance during all of 2013.

Bloomberg: – Junk investors prefer short-term as long-term ETFs fade. – Investors in exchange-traded funds that buy junk bonds are shifting into shorter-maturity debt that’s less vulnerable to the Federal Reserve’s withdrawal of stimulus measures.


Emerging Markets

Reuters: – Investors pick dollar debt for emerging market re-entry. –  Investors dipping their toes back into emerging markets are choosing hard currency debt which, thanks to rich yields and expectations for a stronger dollar, is the developing world’s best performing asset class this year.

WSJ: – Retail bond fund highlights conundrum facing frontier investors. – A new mutual fund dedicated specifically to frontier bonds highlights some of the risks frontier markets face as they open up to more foreign capital flows.


Catastrophe Bonds

AllAboutAlpha: – Catastrophe bonds and climate hedging: A talk with Barney Schauble of Nephila. – We were fortunate enough to get Barney Schauble of Nephila to sit still for some questions about the effects of climate change and what rational investors are doing about them.


Investment Strategy

LearnBonds: – Bond investors should think preferred stocks for generous yields. – Looking for decent yields?  You’re not going to find them in the bond market, with 10-year Treasuries well under 3% and 10-year triple-A rated corporates a little over 3%.  But you can find them – if you know where to look.

David Fabian: – Time to trade in your aggregate bond ETFs. – Over the years I have seen investors make a number of mistakes with their income portfolios. Typically these range from having too much cash to being over allocated to a single asset class. However, the most egregious error that I come across all too frequently is the use of aggregate bond funds as core fixed-income holdings.

ETF Database: – Another way to build your fixed income portfolio. – It seems low yields are here to stay for now, as the Federal Reserve’s latest minutes reinforced that it intends to keep rates “low for long”. That’s why it’s especially important to have a well-diversified portfolio of investments at the center of your portfolio, one that includes a fixed income allocation that is structured towards yield, but is also mindful of risk.

Michael A. Gayed: – Bonds are yelling to Yellen: You’re wrong! – While the Fed may think that the economy is about to pick up, various intermarket trends are disagreeing in a major way. It is rather shocking to see how strong long duration Treasuries have been despite the Fed stepping away. Why is it that yields are falling if things are well.


Bond Funds

Reuters: – Gundlach’s DoubleLine Capital sees third straight month of inflows. – Jeffrey Gundlach’s DoubleLine Capital said on Thursday it had $442.5 million of net inflows into its open-end funds for April, the third consecutive month of new cash for the Los Angeles-based firm.

WSJ: – Pimco’s Total return fund saw $3.1 billion outflow last month. – Investors pulled $3.1 billion from Pacific Investment Management Co.’s flagship Total Return Fund in April, marking the 12th consecutive month of outflows.


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