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Last week’s bombshell that Bill Gross was quitting PIMCO to manage a new fund at Janus Capital throws up an interesting question. Should you follow him?
Despite Gross’s reputation taking a bit of battering this year, investors should be in no doubt about his ability as an investor. Since PIMCO Total Return Fund launched in May 1987, it has earned an average of 7.9% annually; the overall bond market, as measured by the Barclays BARC.LN -0.77% U.S. Aggregate Bond Index, averaged 6.8% annually over the same period. Before expenses, Mr. Gross beat the index by nearly two percentage points each and every year.
To see a list of high yielding CDs go here.
Is that reason alone to abandon PIMCO? Probably not. Funds of that size are not run by just one person, and there is no doubt, PIMCO has an incredibly talented team behind it. Even if they are not as high-profile as their former boss.
Jason Zweig of the Wall St Journal says that Gross’s departure might even benefit the bond giant:
The performance of Total Return is likely to be a lot less entertaining without Mr. Gross. But if you still own the fund, you should ask yourself whether its returns could suffer enough from his departure to make it worth your while to move.
A wave of money could well rush out of Pimco Total Return. But chances are, the fund will end up being managed a lot less flamboyantly—and, in the long run, that might help investors break the cycle of chasing performance to their own detriment.
But there are reasons to stick with Gross as well. Not least that he will now be managing a fund much smaller than PIMCO Total Return. Which should allow him to be more selective about the trades he makes.
David Merkel of Aleph Blog writes:
[Gross] is starting with a clean slate, and will be able to implement positions that seem attractive to him that would not have been attractive at Pimco because they would have been too small. Managing less money lets Bill Gross be more choosy.
Second, in the short run, growth in bond assets at Janus will temporarily push up the prices of bonds held by Janus. Those that get in early would benefit from that if bond assets grow under the management of Bill Gross. Just keep your eye on when assets stop growing if you are buying for that speculative reason.
A third potential reason to follow Gross depends on how much Pimco continues to use his quantitative strategies. If Pimco abandons them (unlikely, but not impossible), Janus would get the chance to use them on much less money, which would make the excess returns greater. If I were considering this as a reason, I would watch the turnover in Pimco’s main funds, and see if certain classes of assets disappear.
My last point here is that the abilities of Bill Gross will do better managing less money, but the effect won’t be so great if he is competing with Pimco to implement the same strategies. At minimum, he’s not likely to do worse than at Pimco, and in the short-run, there are some reasons why he will likely do better.
At the end of the day, the choice is yours. But before you follow Gross to Janus, Merkel has one final piece of advice. “Review the prospectus to see what degree of flexibility with derivatives Gross will have. If it is similar to what he had at Pimco, he is likely following the same strategy.”
Todays Other Top Stories
Learn Bonds: – Bond Ratings – One person’s junk is another person’s treasure. – Why is it that certain securities are assigned “junk” ratings, when, in my opinion, they deserve an investment-grade rating. And how is it some companies manage to hold on to their triple-B-rated holdings, when quite frankly they don’t deserve to?
Bloomberg: – Junk bonds prove September Treasure as defaults ebb: Muni credit. – The riskiest municipal bonds are beating the market for the longest stretch in 20 months as investors bet a strengthening economy will keep defaults at the lowest in five years.
Next City: – A new breed of muni bond is financing climate change adaptation. – If Scott Stringer has his way, New York will soon be the nation’s largest municipal player in the burgeoning green bond market. On Wednesday, Stringer, the city comptroller, proposed a new program for issuing municipal bonds specifically dedicated to financing climate-friendly projects. Announced during UN Climate Week, Stringer’s proposal came a few days after Mayor Bill de Blasio unveiled a plan to cut the city’s greenhouse gas emissions by 80 percent by 2050.
Market Realist: – Why we’ve seen a solid run in the municipal bonds market. – t’s been a solid run for municipal bonds so far in 2014. And that has many investors wondering what to do next. Peter Hayes prescribes a three-step muni workout.
Bond Buyer: – Taxables lure investors as tax-frees get expensive. – Taxable municipal bond sales surged to a five-month high in the past week, attracting yield-hungry investors as tax free spreads tighten.
Advisor Perspectives: – 5 Reasons why short-term municipal bonds make sense now. – Last week Federal Reserve Chairwoman Janet Yellen insisted that record-low interest rates will stay as they are for a “considerable time.” So what does that mean for bond investors? Many people realize that rising interest rates affect yields and prices, but what others might not know is that if you stick closely to short-term, investment-grade debt securities—the very kind our Near-Term Tax Free Fund (NEARX) invests in—the impact of such a rate hike is not as dramatic as some investors might think.
San Jose Mercury News: – Retirement planner: The intricacies of the bond market. – The hysteria and hype caused by the IPO of Alibaba makes the moment seem too much like 1999. Even my wife felt the need to buy some of this huge online merchandising company, but the price blew right through her limit order (which is the price you tell your broker that you won’t exceed if the stock is spiking in value). The whole scene … her gnashing of teeth in frustration … made me think about bonds and how much I had wished I had had some by the time 2000 rolled around.
FT: – PIMCO upheaval rattles bond market. – (Subscription required) Upheaval at the top of Pimco rattled US bond and derivatives markets on Monday, as pension funds and other large investors braced for large outflows from the world’s largest bond manager.
Businessweek: – Bond warnings emerge as ’94 parallels seen in Fed-CPI split. – For bond investors who are convinced a lack of inflation will keep the Federal Reserve from upending Treasuries when it begins to raise interest rates, there’s one parallel in history that suggests they still have cause for concern.
Market Realist: – Why the Fed’s Dudley and Evans advise patience in lifting rates. – After the 2008 financial crisis and Great Recession, U.S. monetary policy has been designed to boost economic growth and create jobs. The Fed has kept the federal funds rate at near-zero levels since December 2008. It’s also embarked on three rounds of quantitative easing (or QE) to inject liquidity and spur business investment and consumer spending.
WSJ: – U.S. Government bonds boosted by haven demand. – (Subscription required) Treasury bonds strengthened Monday as political disturbance in Hong Kong added to concerns over the global economic outlook and boosted demand for haven assets.
Investment Grade Bonds
BlackRock: – Four ways to increase your corporate bond exposure. – Record low U.S. Treasury rates continue to push investors to find yield elsewhere, and it seems that corporations are rushing to meet the demand. Matt Tucker explains.
High Yield Bonds
CNBC: – Is the long-expected high-yield selloff under way? – The selloff in high-yield bond exchange-traded-funds (ETFs) last week has revived fears that the sector may be headed for a bruising.
Investment Week: – PIMCO’s Kiesel: High yield sell-off means short-dated opportunity. – (Registration required) The recent sell-off in high yield means opportunities in the ‘rising stars’, housing, and building materials sectors, explains PIMCO’s deputy CIO Mark Kiesel.
CNBC: – High yield well owned. – A broad look at the health of stocks and fixed income, with Kate Moore, JPMorgan Private Bank chief investment strategist.
FT: – Phones 4U collapse chills ‘junk’ market. –The spectacular collapse of Phones 4U this month provides a stark reminder of the risks investors run when holding high-yield corporate debt – and why in the US they still often call such issues “junk” bonds.
ETF Daily News: – Emerging market ETFs in trouble on stronger dollar? – With the U.S. economy appearing stronger from Q2 of this year, many investors turned their focus to the domestic market. This trend isn’t limited to the equity world either, as long-term Treasury securities have also seen solid inflows this year which can satisfy investors’ need for relatively better yield and capital appreciation.
Reuters: – Willis Group places $250 mln California catastrophe-bond. – Willis Capital Markets & Advisory (WCMA), part of Willis Group Holdings said on Friday it had structured and placed a $250 million catastrophe bond deal with California’s largest provider of workplace insurance.
Financial Post: – How ETF investors can prepare for rising rates. – There have been plenty of surprises this year as we head into the final quarter: yields failing to rise, a strengthening U.S. dollar, and a bull market that has continued without major hiccups despite significant geopolitical challenges and structural issues, particularly in Europe.
Nerd Wallet: – Is it time to reduce the bond exposure in your portfolio? – For the last half-decade, investors have been continually concerned about rising interest rates and the effect they may have on the bond portion of their investment portfolio. The fear is that if interest rates rise, the bonds currently held by investors will be outdated and provide investment returns that are less than what new bonds issued at the higher yields would return.
Think Advisor: – 3 Investments retirees should avoid: Morningstar’s Benz. – Most retirees don’t want to spend much of their time stressing over their portfolios. Even if they’re working with an advisor, they may not benefit much from certain investments that can have extra costs and complex strategies.
USA Today: – The long bond rally lives on. – For the past five years, prognosticators, legendary fund managers and other savants have predicted the end of the incredible 30-year bull market in U.S. Treasury bonds. Odds are, though, that it won’t stop soon, thanks to Treasuries’ status as a refuge in a turbulent world and the Federal Reserve’s ongoing interest in avoiding an economy-jolting rate shock.
ETF.com: – Has exodus from PIMCO’s ‘BOND’ begun? – A huge spike in trading volume Friday on the PIMCO Total Return ETF (BOND | B) suggests assets may be flowing out of the fund that, until Thursday, Sept. 24, was managed by Bill Gross, PIMCO’s legendary co-founder who resigned suddenly just before the firm was set to sack him.
Benzinga: – Best and worst ETFs of the week amid ‘bond king’s’ departure. – The markets finished over 1 percent lower this week as sellers took the reins and pushed the SPDR S&P 500 ETF (NYSE: SPY) into negative territory for September.
ICI: – Bloomberg ignores the evidence on bond ETFs. – As this story notes, ICI’s empirical research shows that the vast majority of ETF market activity does not trigger activity in the underlying markets. It is not correct to assert that every bond ETF trade requires someone to buy or sell bonds. That should help allay concerns about any systemic effects of ETF trading.
ETF.com: – Daily ETF watch: 4 PIMCO ETFs close. – Friday was the last trading day for four of PIMCO’s fixed-income exchange-traded funds. Although the funds had all been trading for a few years, they had failed to accumulate assets.
Morningstar: – The still-sorry state of bond-fund disclosure. – It’s five years after the crisis, and bond funds still badly need to improve how they tell shareholders what they own.
yields lower, curves flatter, though almost has a hint of “capitulation” in the air this morning – might be time to reverse soon
— Peter Tchir (@TFMkts) September 29, 2014
Jeffrey Gundlach tells me DoubleLine Capital saw $400-500 mln on Friday in wake of Gross’ departure from Pimco @Reuters
— Jennifer Ablan (@jennablan) September 29, 2014
So as not to cause any confusion with the timestamp vigilantes the official side of me has changed my view on the long bond
— Peter Tchir (@TFMkts) September 29, 2014