The “Bond King” Lost His Crown

A name that has been synonymous with active bond management is Bill Gross, formerly of PIMCO.  Gross is known for his 27 year reign (26 full calendar years) at the helm of the PIMCO Total Return fund (PTTRX).  There is no denying that his overall record is impressive, with only seven years in which the return fell short of the Morningstar analyst assigned benchmark.  However, as Mr. Gross implied in his April 2013 Investment Outlook letter, luck played a substantial role in that leverage was used during a time period when it yielded a handsome payoff.

“All of us, even the old guys like Buffett, Soros, Fuss, yeah—me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience…  An investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of ‘greatness.’ Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch” Gross opined.1

Gross’s fund was the largest fixed income mutual fund in existence with more than $230 billion of assets. And, then came  2013-2014. Gross’ fund hemorrhaged assets, losing more than $68 billion during 16 straight months of negative flows as it trailed Barclays Aggregate Bond Index benchmark by 1.45 percentage points.2  Morningstar downgraded PIMCO’s overall stewardship grade from a B to a C as a most public falling out ensued between Bill Gross and his former Co-Chief Investment Officer Mohamed El-Erian. Amidst reports of bizarre behavior, Gross unceremoniously departed PIMCO in September 2014. In the wake of the news, another $27 billion exited the fund within five days of Gross’ departure, leaving investors concerned about the future of their investment in the fund.

Interestingly enough, during his tenure as an active fund manager at PIMCO, Mr. Gross joined the ranks of Warren Buffett and Peter Lynch in giving a solid endorsement to indexing. In his December 2013 Investment Outlook letter, Gross reminisced about his younger days when Jack Bogle introduced the first index fund available to retail investors:

“His [Bogle’s] early business model at Vanguard promoting index funds was a mystery to me for at least a few of my beginning years at PIMCO. Why would most investors be content with just average performance, I wondered? The answer is certainly now obvious; an investor should want the highest performance for the least amount of risk, and for almost all measurable asset classes, index funds and many ETFs have done a better job than almost all active managers primarily because of lower fees.”3

Rather than spending time and resources searching for the stock or bond that will outperform in the future, all investors are better served by indexing in all asset classes.

Step 3Stock Pickers