One year later: Maybe Bill Gross wasn’t such an investment wizard after all
The bombshell departure of investment guru Bill Gross from Newport Beach-based Pimco took place a year ago this week (Sept. 26, 2014, to be precise), so anniversary post-mortems are timely.
At the Financial Times, Stephen Foley and Alistair Gray apply research from Morningstar to make two essential points. First, investors would have done much better sticking with the investment fund Gross left behind, the Pimco Total Return Fund, than following him to his new perch at Janus Corp., where he established the Janus Global Unconstrained Bond Fund. Second, while lots of investment money flowed out of Pimco’s fund, very little of it actually did follow Gross to Janus.
Here are the raw numbers from Morningstar (see accompanying chart): in the year since Gross’ departure from the firm he had co-founded in 1971, the Pimco fund has returned a cumulative 1.71%. His Janus fund has lost a cumulative 2.5%.
Put another way, as of Monday, a $10,000 investment in both funds at the time of Gross’s job change would have been worth $10,171 at Pimco but only $9,750 at Janus. Neither fund matched the return of the benchmark Barclays U.S. aggregate bond index, which would have grown it to about $10,232.
More than $120 billion in assets has flowed out of the Pimco fund dating to last September, Morningstar figures show; but the Janus fund only gained about $1.5 billion--including some $700 million that Gross himself contributed, as Janus acknowledged in January.
As the FT observes, the results somewhat validate Pimco’s position at the time of Gross’ departure that what was important for the firm was “the investment process, trading infrastructure and intellectual firepower across the asset management group” rather than “any one individual’s investing talent.”
The record contradicts the received wisdom among investment mavens at the time, which we described then as that Gross’ move would be “a disaster for Pimco and a windfall for Janus.” Though the asset outflow certainly has hurt the former, Janus appears still to be waiting for the windfall.
The trend line of the last year also underscores something that was becoming obvious even then--that Gross’ fabled magic touch was showing its age. The personal peculiarities of Gross, then 70, were beginning to overshadow his investment reputation, leading to the departure of his co-chief executive, Mohamed El-Erian. (El-Erian remains chief economic advisor at Pimco’s parent, Allianz.)
Pimco Total Return had already lost 24% of its assets in the two years before Gross’ resignation amid disappointing returns. The fund’s superb record during the Gross era was beginning to look a bit like an accident of timing: The yield on the 10-year U.S. Treasury bond fell from 8.61% in May 1987, when he started the fund, to 2.52% when he left, delivering a huge boost to bond prices.
In February 2011, Gross put his reputation on the line with a call to investors to abandon Treasuries outright, taking the fund’s allocation down to zero and advising followers to “exorcise” them from their portfolios. It was a gutsy call...and dead wrong. Yields fell from 3.58% to 1.53% over the following 15 months.
It’s fair to observe that the disparity between the Pimco and Janus funds’ performance over the last year isn’t so great that a year from now their positions might be reversed.
But that doesn’t overshadow the lesson that great investors, even those hailed as geniuses, aren’t infallible, and that sometimes the more latitude an investment star receives, the worse the results. The FT notes that Gross’ Janus fund operates almost like a hedge fund, making both positive and negative bets on bonds, delving into riskier markets than he could at Pimco, and making “widespread use of derivatives.”
That freedom hasn’t helped Gross navigate in the stormy weather of the past few months, during which it has underperformed the market. Gross has been an exciting fellow to watch, but when your money is on the line, sometimes boring is best.
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