News that legendary investor and one-time “Bond King” Bill Gross would retire from investing after nearly five decades in the asset management business – a storied career where he built PIMCO into a giant in the industry while managing its Total Return bond fund, the largest mutual fund in the world – was perhaps the biggest investing headline during a day where the start of the Chinese lunar new year, a lull in US earnings and the national Super Bowl-inspired hangover day led to a dearth of news.
And in a coup for Bloomberg TV, Gross appeared on America’s third most-popular financial TV network for an exit interview of sorts, where the manager of the Janus Unconstrained bond fund, which has persistently posted subpar returns since he jumped ship from PIMCO in 2014, delved into some of the biggest market topics of the day, while touching on some of his biggest regrets in recent years.
The conversation began, as most conversations with high-profile portfolio managers do these days, with a discussion of Gross’s views on the long-term impacts of QE, and whether Gross believes central bankers ‘got in his way’ during the past few years.
Gross agreed that central banks have moved away form “Philips Curve theology” and now the big question facing markets is how this massive increase in leverage, and the rock-bottom interest rates that have been a big part of this, will lead to an insurmountable strain not just for every day savers, but for banks and the broader financial system.
“They didn’t go by the book and it’s up to the portfolio manager to analyze what the new book is…for five six seven years QE has provided an opportunity for bond investors to take advantage of capital gains. The question became what would the effect of US tightening by the Federal Reserve and the ultimate exclusion of Quantitative Easing and inclusion of Quantitative Tightening what would that do with respect to the ECB.”
Asked about whether the breakdown in the Philips Curve or the massive increase in the size of the Fed’s balance sheet was the greater harm, Gross replied that “it’s basically both” because the “savings function” for investors has been put at risk. He also said that he sees the Federal Reserve ending the practice of quantitative tightening over “the next few quarters.”
“I think it’s basically both. In terms of the balance sheet I find it very interesting…in terms of the Fed it expanded its balance sheet form $1 trillion to $4 trillion in a world where the total credit universe was $60 trillion. They expanded that and basically equitized their portfolio to $4 trillion…and that was a very levered situation. But now quantitative tightening reducing that to some extent though probably going to stop in the next few quarters of so...it is perhaps at a point where the leverage inherent in the US economy and the Fed’s balance sheet…is better, though not necessarily satisfactory.”
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“The disadvantage in addition to potential inflation down the road…the disadvantage to negative interest rates in the rest of the world is that savers are disadvantaged and insurance companies and banks are disadvantaged...so the saving function is at risk.”
As for whether the Fed and the ECB can easily extricate themselves from the low-interest-rate world that they have created, Gross said that he’s more focused on Japan, because the monetary experiments have been running for a much longer time frame.
“It will take time to observe…haven’t we had that for the last four or five years? What we’ve found in the EZ is that these rates are just enough to keep growth above the line and enough to keep inflation below 1% or 2%. Japan for me Tom is the petri dish because they have been doing this for 10 or 15 years and an economist would have predicted that if the central bank was buying up all of the debt being issued…that this would be quite inflationary but it hasn’t. So the question going forward for economists is will this create inflation…and my questions is will this
Moving on from the discussion of markets, Gross insisted that his decision to retire was made by him alone…and that he feels it’s time to sit back and enjoy life, adding that, like Patriots quarterback Tom Brady, he has “won a few Super Bowl rings myself” (back in 2010, Morningstar named Gross the top fixed income manager of the decade).
“Well no, I did it unilaterally in consultation with my family and my partner Amy Schwartz who I’m having so much fun with and it has been almost half a century of watching screens and waking up in the middle of the night to check Asia and so on – and in Tom Brady years that’s a long time – I’ve got a few Super Bowl rings myself and I think it’s time to enjoy myself and enjoy my family.”
Asked whether he has any regrets about pursuing the ‘unconstrained’ fund model, Gross effectively conceded that Bloomberg View columnist Brian Chappatta had a point when he pointed out in a column published Monday that Gross made a mistake by indulging his belief that he was smarter than the rest of the market.
Or as Gross put it: “Maybe I should have been a little more constrained.”
“Half of the fund is mine and I haven’t taken any money out of the fund others have as you’ve mentioned…I look back on it the performance on the unconstrained fund over the past four years with Janus has been unsatisfactory no doubt but still positive in nominal terms. What I’ve like to mention though is I’ve managed some total return accounts for Janus – which is what I’m famous for – and they’ve actually outperformed by 100 basis points and even outperformed PIMCO. So maybe I should have stuck to total return and been a little more constrained.”
In addition to maybe focusing on Total Return (where he continued to outperform the market) instead of the unconstrained model, Gross also admitted that he probably put too many “chips on the table” with his big bet that the Treasury-bund spread would compress.
“Well unconstrained has come to mean basically go anywhere. The total return concept I developed was based on the concept of measured risk taking it’s what I learned in Black Jack you didn’t put a lot of risk on the table…so for the past three or four years the negative trade for unconstrained has always been US vs. Germany in terms of a spread…German bunds in my portfolio started out 190 basis points over and they’re now 250-plus over and that’s been the big decider and one where I probably shouldn’t have put so many chips on the table.”
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“I think it did for me and perhaps for me and perhaps for other unconstrained funds too. The old Ed Thorpe term, the “gamblers’ ruin” concept, is that you can only bet 2% of your total capital. I had positions in unconstrained that were much more than that and certainly the Germany-US Treasury trade…investors were expecting hedge fund like returns of 5%+ but returns were more like 1% or 2%.”
In what sounded like an flagrant example of the pot calling the kettle black, Gross, when asked about the issues with the hedge fund model after HFs produced abysmal returns last year, said the issue is that they aren’t diversified enough in terms of risk.
“I think it was broken for a long time…obviously the hedge fund concept suggested long and short but it was really one where managers took a lot of risk. When you speak to diversification perhaps most of those hedge funds were non-diversified in terms of the risks they were taking…they were taking levered risk and still are…and so to the extent that markets move in a risk off type of mode – and they have in December and in other periods of time then the hedge fund concept is really an exposure of risk than anything else and it needs to be more diversified for sure.”
While the investing public will surely miss Gross – particularly after all of the legal drama stemming from his messy divorce, his lawsuit against the firm he helped create and the kooky investing insights featuring the views of his most reliable junior analyst (his dead cat, Bob) – we have a funny feeling that, if the ECB follows in the Fed’s footsteps and totally capitulates on its tightening plans, finally resulting in the spread compression that Gross has been waiting for, we could see the one-time ‘Bond King’ ride again.
via ZeroHedge News http://bit.ly/2MOENHp Tyler Durden