Is PIMCO's Bill Gross still the bond king?
PIMCO's Bill Gross has long been known in investment circles as the "bond king." That's because his flagship fund, PIMCO Total Return (PTTCX) is not only the biggest bond mutual fund in history but has also been one of the best performing. Gross was the keynote speaker at the Morningstar Investment Conference in Chicago, which ended last Friday. In his speech, he shared some insights on the future for bonds and also raised some eyebrows.
The biggest buzz at the conference had little to do with what he said about bonds and more about his antics on the stage. Gross came out wearing sunglasses and compared himself to Justin Bieber and "The Manchurian Candidate," implying he could hypnotize reporters to get more favorable coverage. It was a speech many will remember for a long time. Unfortunately, based upon those I spoke with, it may not be remembered in a good way.
Gross acknowledged that a stunning $50 billion had been pulled out of all share classes of this fund over the past year and implied it was because of bad media coverage. Earlier this year, PIMCO's CEO, Mohamed El-Erian, abruptly resigned amid media coverage of a clash with Gross.
Curiously, Gross stated that the Total Return Bond fund may no longer be larger than the Vanguard Total Stock Fund (VTSAX) depending upon what the stock market did that day. Morningstar shows all share classes of the PIMCO fund to be about $229 billion, while all share classes of the Vanguard fund total $339 billion as of June 20, 2014. I suspect we would have all known if the U.S. stock market had fallen 32 percent that day, making his Total Return Bond Fund the largest fund again.
Gross claimed his Total Return Bond Fund could add a 0.75 percent annual return through such means as buying interest rate futures which were more attractively priced than the bonds themselves. He said this was extra return while taking on no more risk, though he may be "giving away the keys" to his outperformance. After a long run of besting the benchmark set by Morningstar (Barclay's Aggregate Bond Index), the fund has lagged in two of the past three years, though the much lower cost institutional share class fared better. All share classes are lagging this year through June 20.
Gross was more optimistic on the future of bonds, using a term he referred to frequently (by one count 26 times) as "the new neutral." By this term, he was attempting to convey that the Fed will hold real inflation adjusted interest rates at zero for some time to come. Higher rates could lead to a decline in bonds, though the Fed only controls the short-term overnight rate.
Only time will tell if Bill Gross, and PIMCO, is still the bond king. I've previously questioned whether the Total Return Fund is taking on more risk to achieve extra return. Gross was certainly dead wrong in warning investors to be very afraid of the stock market in early 2013. That year, the Total Return of a broad U.S. stock fund, such as every share class of the Vanguard Total Stock Fund, was up well over 33 percent and nearly all bond funds declined.
My own view is that Bill Gross and his team at PIMCO are still one of the top active bond managers around and a lower fee share class of the Total Return Bond Fund (PTTRX) is better than most bond funds. But if the purpose of his talk was to restore the confidence of the roughly 1,900 advisors and journalists in the audience, he did not succeed.