(December 4, 2013) — As the PIMCO Total Return Fund lost its title as the world’s largest bond fund to Vanguard last month, its Founder and co-CIO Bill Gross stated he has a plan for a comeback.
According to Morningstar, the fund suffered its seventh consecutive month of outflows in November. Down almost 3.5% this year, the fund saw a $3.7 billion pull out this month leaving $244 billion in total assets under management and allowing the $251 billion Vanguard Total Stock Market Index fund to steal the crown.
“We have positioned our bond wars portfolio—heavily front-end maturity loaded along with credit, volatility and curve steepening positions, with the aim of outperforming Vanguard as well as many other active managers,” Gross said in his December investment outlook.
The bond guru admitted such portfolio construction would most likely depend on potential market movements: “Overlevered economies and their financial markets must at some point pay a price, experience a haircut, and flush confident investors from the comfort of this Great Moderation Part II.”
The strategy is PIMCO’s response not only to a net cashout of $36.9 billion from the fund year-to-date, but also to concerns of investors’ disillusionment by the bull market and central banks’ wager on artificially priced assets.
“Investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth,” Gross said.
In the statement, the leader of the $2 trillion asset management firm outlined what keeps him up at night: the possibility of a “T junction.”
As markets reach a “time-uncertain inflection point,” Gross’ theory went, they proceed in two possible directions: “either bubbly right or bubble-popping left due to the negative aspects of fiscal and monetary policies in a highly levered world.” Herein Gross identified the perilous future potential of market movements.”
The ‘T,’ however, is shaped more like a winged eagle, according to Gross, pointing to a gradual shift in left and right. This phenomenon was especially true for the shaky bond market, as the US Federal Reserve teased investors with tapering talks through the summer with the eventual postponement leading to lowering of interest rates.
“Sort of a reverse ‘Sisyphus’ moment—two steps upwards, one step back as it applies to yields and more of a [eagle’s wings], than a T,” he said.
And as institutional investors move to riskier assets such as alternatives and hedge funds, he argued that they’re in danger of falling into a trap of artificially priced assets and artificially low interest rates.
“If the monetary and fiscal policies cannot produce the real growth that markets are priced for (and they have not), then investors at the margin—astute active investors like PIMCO, Bridgewater, and GMO—will begin to prefer the comforts of a less risk-oriented migration,” Gross said.
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