Bill Gross, a legendary bond fund manager, is about to close the
books on a terrible year for his $241 billion PIMCO Total Return Fund.
His missteps underscore the risks of a concentrated investment and in
staying too long with a flawed strategy.
Gross
is known as the bond king and has been likened to both Peter Lynch and
Warren Buffett. That’s how good he’s been at buying and selling bonds
over the years. But earlier this year he made a big bet that interest
rates would rise, and when rates fell instead his fund began to lag
badly.
The fund is up less than 4% this year, about half the gain
of the average comparable bond fund in what has been a good year for
most bond investors. In the bond world, where yields typically drive
returns, such underperformance is epic. Gross ranks in the bottom 10% of
bond fund managers this year.
His long-term record remains
stellar. But in a what-have-you-done-lately world, investors have begun
to exit his fund. Last month, his fund had net outflows of $500 million
as the universe of comparable funds enjoyed net inflows of more than
$10 billion. Gross likely will record his first calendar year of net
outflows when 2011 draws to a close. His fund was launched in 1987.
What
went wrong? Gross underestimated the European debt crisis and the
punishing effect of last summer’s Congressional wrangling over the debt
ceiling. These events eroded confidence in the global economy and sent
interest rates plunging. Gross had been positioned for higher rates,
evidently thinking that the economy would soon show signs of recovering.
He
apologized to his investors for the misread—but not necessarily for the
outsized gamble. Indeed, in an effort to get ahead of the next trend he
has been loading up on mortgage-related securities that should rise if
the Federal Reserve ramps up a program to buy mortgages in an attempt to
prop up the U.S. housing market, as some believe the Fed plans to do.
That’s
how Gross earns his millions. He makes bold bets and is right often
enough to keep getting more chances. But his misstep this year is eerily
reminiscent of another guru gaffe—stock picker Bill Miller’s bad bet
on financial shares in 2008, which caused his stock fund to lose 55% of
its value and sent loyal investors fleeing from his Legg Mason Value
Trust fund. Despite years of outperforming, Miller retired last month
with a diminished reputation.
No one is saying it’s time for Gross
to hang it up. Gross has said that “the competitive fire burns even
hotter.” Odds are he’ll rebound. But Gross’s near-term troubles are one
more example of how a concentrated bet (Do you have too much company stock in your 401(k)?) and staying with a flawed strategy too long (Are you saving too little and counting on unrealistic returns?) can damage your portfolio and maybe your retirement dreams.
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