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Bill Gross gives somber outlook for financial markets

Bill Gross gives somber outlook for financial markets
After clashing with other Pimco executives, Bill Gross quit in late September to run the Janus Unconstrained fund. (Andrew Harrer / Bloomberg)

In his first presentation to investors since his abrupt departure from Pacific Investment Management Co., "bond king" Bill Gross acknowledged he'd had a "rough few weeks" and would have preferred to retire from Pimco, the Newport Beach investment firm he helped found.

"Had there been a reasonable way to continue there, I would have stayed to my last breath," Gross wrote in a letter to investors in his new firm, Janus Capital. "But slowly, and with great hesitation, I came to understand that it was time for me to leave."

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Speaking on a webcast billed as a coming-out party for the new fund that Gross will run at Janus, he acknowledged the "rough seas" and "disruption" surrounding his departure. The resignation last month, following clashes with other executives, was accompanied by a spike in investor defections from Pimco's mammoth Total Return Fund, which Gross had managed.

Gross, 70, was similarly somber about the outlook for financial markets and the prospects for the fund he'll be running for Janus. Seated during the webcast with Dick Weil, Janus' chief executive, Gross gave a conventional assessment of the global economy and what he called structural forces that will mute economic growth.

Gross said investors must recognize that the long-running bull market in bonds — driven by historically low interest rates — is coming to an end. The days of double-digit returns are over, he warned.

"Times have changed," he said. "It's too bad for Bill Gross, too bad for Janus, and too bad for investors.… Bye-bye to those days."

He predicted that the short-term interest rates set by the Federal Reserve — expected to rise as the U.S. economy gains traction and the Fed moves to ward off inflation — would nonetheless rise only moderately, to about 2% from near-zero levels today. Rates have remained at historic lows because of the Fed's efforts to combat the effects of financial crisis of 2008.

Further, Gross said, a lack of aggregate demand in the economy is holding back growth and should keep Fed officials wanting to hold rates down.

Investors should expect bonds to return 2% to 4%, while returns on stocks would be only modestly better, at 5% to 6%, Gross predicted.

He said he sympathized with "the plight" of middle-class investors, struggling to earn enough on investments to pay for retirement or college. He said he would seek to hire staff who understood the difficult task of finding reasonable returns in a world of slow growth and low yields on securities.

Gross' assessment was far more cautious than earlier calls he'd made while at Pimco, particularly a massive bet in 2011 on a belief — later proved wrong — that interest rates were set to rise sharply.

Instead, they fell, marking a lengthy period of uncharacteristic underperformance for the Total Return Fund, and 16 months of investor defections from the fund starting in the spring of 2013.

Gross has had a more cautious outlook about rates — that they will rise only about 2 percentage points when they finally go up — since at least last spring.

Weil has set up a small office in Newport Beach to house Gross' operation, which starts with just five employees. Two blocks away in the Newport Center complex, Pimco's headquarters is the sole tenant of a 20-story office building.

With nearly $2 trillion in assets under management, Pimco is more than 10 times the size of Denver-based Janus. Gross will manage the Janus Global Unconstrained Bond Fund, which had $79 million in assets as of Sept. 30 — compared with about $200 billion at Pimco's flagship Total Return Fund.

Though size has its advantages, Gross said, the new fund will allow him to operate with more flexibility and less scrutiny. At Pimco, he made enormous, market-moving trades that other traders found impossible to ignore.

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"The fact that the Street doesn't follow your trail — the Hansel and Gretel bread crumbs to the house — is a big advantage," he said.

Gross said he would avoid investing much in longer-term bonds at his new fund in order to keep from being clobbered when interest rates eventually rise.

His new fund, known as an "unconstrained bond fund," is designed to allow greater flexibility to invest in shorter-term securities, which hold their value relative to longer-term bonds when interest rates are rising, and to invest across borders.

Opportunities include bonds from Mexico, which Gross said are attractive because the country has half the debt load of the United States and offers higher interest rates in a rapidly developing economy driven by the oil and gas industry.

Sumit Desai, an analyst for Morningstar, said the call left plenty of unanswered questions, particularly how someone of Gross' stature would operate within Janus' already well-defined management structure.

Gross — who spent 43 years at Pimco — once beat the returns of rival bond traders so frequently that investment researcher Morningstar Inc. proclaimed him the fund manager of the decade in 2010.

But his bad call in 2011 hurt performance, and bond investors also took notice of the turmoil in Pimco's executive suites, including the sudden departure in January of Mohamed El-Erian, Pimco's chief executive, who had been regarded as the replacement in waiting for the aging Gross.

Pimco Total Return, the world's largest mutual fund, already had seen investors yank about $70 billion — a quarter of all the money once managed by the fund — by the time Gross abruptly departed Sept. 26.

His exit fueled a three-day outflow of an additional $20 billion.

Of that, though, just $66.4 million wound up in the Janus unconstrained fund, according to Morningstar.

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