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Bill Gross’ own boss says the bond king has “been wrong badly”

Bill Gross’ own boss says the bond king has “been wrong badly”

Bill Gross is famous in Wall Street circles as an expert in the bond market; he is often referred to by many, and well-known in media as the “Bond King”. He co-founded PIMCO in 1971 and managed their Total Return Fund, which grew to become the largest bond mutual fund (and one of the largest of all mutual funds in the world), with more than $270 billion in assets under management. Four years ago, he left PIMCO to join Janus Henderson in 2014, managing their $2.24 billion Global Unrestrained Bond fund. The author of two popular and well-respected books on investing, he is also famous for holding large positions in troubled mortgage agencies Freddie Mac and Fannie Mae mortgage bonds in 2008. His move proved prescient, as the federal government’s takeover – and subsequent stabilization of those bonds – netted him about $1.7 billion.

It seems some of Mr. Gross’ luster has faded. His departure from PIMCO was anything but civil; in October of 2015 he sued the company he founded, claiming to have been forced out by a dishonest and unethical executive cabal. The 74-year old money manager is in the midst of a very messy and very public divorce, with vicious accusations being leveled on both sides.

To stoke the fire even further, in 2015, Gross declared that bunds (German government bonds) were “the short of a lifetime” at about the same time he predicted the end of the latest bull market in the U.S. How have those predictions turned out? Well, the stock market is on the verge of entering the 10th year of a practically unprecedented upward trend, and his big bet that bund yields would have to increase has also failed to materialize. How big? He made bond investments with his new fund that would profit if the spread between 10-year bonds on U.S. Treasuries and German bunds would converge. They haven’t, with U.S. yields gradually increasing to their current rate just a little below 3%, while German yields have continued to hover only a little above 0%. That missed bet has cost the fund big, with its total assets under management shrinking to only about $1.24 billion. 

Of the $1 billion lost so far, about $200 million came in just the last month from redemptions from fund investors, who are clearly giving voice to their feelings about the fund – and, of course by extension, Mr. Gross’ performance. The drop even prompted Janus Henderson CEO Robert Weil to state, “…he hasn’t lost faith in his fundamental view. But he’s been wrong, and wrong badly in the short term.” That’s anything but a vote of confidence for a man that has built a reputation over more than four decades, but who has clearly been experiencing some turbulence – personal and professional – over the last few years.

It’s pretty easy to beat up on a guy that is willing to put his reputation on the line and make the kind of bold prediction that Mr. Gross did in 2015 about the stock market; but the truth is that much of this market’s continued and extended momentum can be attributed, in large measure, to extremely accommodative monetary policies all over the world. Despite the fact that U.S. bond yields have been increasing for more than a year, they remain near to historical lows, since those increases, under previous Fed chair Janet Yellen as well as new chair Jay Powell, remain very gradual in both pace and size. The mostly flat German bund rate is another testament to the determination of central banks across the world to try to keep stimulating economic growth. Basic economic theory suggests that kind of practice can only go so long before inflation accelerates to dangerous levels and ultimately forces the economy to reverse.

While it’s obvious that Mr. Gross was wrong about the timing of any kind of a downturn – and to be clear, he isn’t the only one – I think it’s a mistake to say that he is wrong in his concerns. The danger really lies in buying into the logic that this market is different, simply because it has defied historical trends.

Is the economy destined to reverse? Yes; every market-based economy experiences ebbs and flows, swings from high to low. Is it destined to happen soon? The truth is that nobody really knows the answer to that question. Instead of laughing at well-educated, good-intentioned professionals who are raising warning flags when they decide to stick their necks out and give you an honest opinion about what they think could happen, we as individual investors would be wiser to consider what they have to say. It doesn’t mean that you completely change your philosophy, or that it’s time to start moving completely into cash until the worst (which hasn’t even begun to happen yet) is over. It does mean that you think about ways to adjust your method to be more conservative. If you aren’t already, think more actively about how you can limit your risk exposure while still keeping a toe in the market while there is still opportunity to be had.

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