What About the "Bond King"?

A name that has become synonymous with active bond management is Bill Gross of PIMCO, particularly in relationship to the PIMCO Total Return fund (PTTRX), for which we now have 26 full calendar years of data. There is no denying that the overall record is impressive, with only seven years where 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. As Gross so eloquently put it:

"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, than 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."1

As the second largest mutual fund in existence with over $230 billion of assets as of the end of April 2014, Bill Gross, like Warren, may have a difficult time delivering a similar level of alpha in the future. Gross's fund has suffered a spate of withdrawals. In April of 2014, investors withdrew $3.1 billion in the twelfth straight month of withdrawals which have totaled $55.3 billion. Over those past twelve months, PTTRX has trailed Barclays Aggregate Bond Index by 1.45 percentage points2. Adding insult to injury, Morningstar downgraded PIMCO's overall stewardship grade from a B to a C in the face of the public falling out between Bill Gross and his former co-Chief Investment Officer Mohamed El-Erian. Recently, 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 while reminiscing 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 exceptional manager in the exceptional asset classes, most investors are better served by indexing in all asset classes.

Step 3Stock Pickers