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The PIMCO leash is still pretty long, say RIAs, Morningstar analysts and others but the bond king needs to rethink how he manages the media in a hurry
June 24, 2014 — 5:25 AM UTC by Lisa Shidler
Brooke’s Note: Bill Gross is an investing star because of his long-term track record, his huge pile of assets and the tailwind of declining interest rates that has persisted for most of his career. The PIMCO founder is a media and speaking star as a positive effluent of his good fortune as an investor. In other words, he could say mostly no wrong all these years because the bond market and his funds always seemed to make his words seem ingenious. Now that his investing record is in a slump, his unusual ways of expressing himself will come under more scrutiny — and they should. As many as half of RIAs entrust a portion of their 'safest’ client assets to the judgment of this man and his company. But as we worked on this article, we gained more sympathy for Mr. Gross than we expected to feel — especially when we weighed the level of raw emotion publicly expressed by other tip-top bond managers at the conference at which Gross made his now-infamous speech.
Bill Gross stepped on a land mine in Chicago last week but PIMCO, bruised but unbowed, will soldier on.
The founder and chief investment officer of Newport, Calif.-based Pacific Investment Management Co. LLC ad-libbed some lines that struck some listeners as bizarre at the annual Morningstar conference last Thursday. See: Bill Gross’s stage antics leave Morningstar conference-goers gobsmacked.
Comments included prolonged references to a child star-turned-delinquent, a melodramatic Cold War thriller and his stated desire — presumably in jest — to hypnotize journalists.
Not quite a disaster
Gross’s talk capped what many people see as an unfortunate culmination bad public appearances and media interviews in the wake of reverses at his company. But behavior that might have spelled professional disaster for a lesser, less eccentric man is being characterized as a misdemeanor public relations violation and RIAs and analysts may be willing to let him off the hook entirely.
“For a guy of his stature, who built up all of this good will with the press, he’s making these bizarre comments about hypnotizing journalists and trying to engage with the media in a room full of thousands of people. It wasn’t a PR disaster but just a strong signal that they don’t have any strong PR plan,” says Jason Lahita founder of Los Angeles-based http://www.riabiz.com/d/ficomm-partners-llc says. See: Behind the PR man’s curtain: how RIAs can successfully deal with the media.
“It’s definitely not just him who is frustrated with the bond market. But that’s the blessing and curse of being the most high-profile and most visible bond manager.” See: Your public relations horror story: It’s not as grim as you think.
PIMCO did not respond to two e-mail requests seeking comment from RIABiz.
There is little question that the advisors and executives at the conference needed to hear what Gross, 70, had to say, according to Russel Kinnel, director of manager research for Chicago-based Morningstar Inc., especially considering that nearly 75% of the advisor audience at last week’s conference have client money invested with PIMCO.
“Advisors want to hear from Bill. There are times when sound bites aren’t good and you want to have a long form. I think in the end people will still think he’s a smart guy with lots of good ideas. It’s times like this when it’s most important to get out and talk to people,” Kinnel said before Gross’s appearance.
Before Gross’s appearance last Thursday, Kinnel said in an interview that his company is still confident in him but that it can’t help but notice the dueling challenges facing PIMCO and its leader.
“When you have the combination of controversy at the firm and PIMCO’s performance, it’s a combination that a lot of people are concerned about,” he said. “This year PIMCO’s call has been wrong. To me, it’s less of a concern. If they continue to misfire then it’s more of a concern. Having five bad months is not so unusual. Success is more long term. The redemption — a few billion out of $200 billion fund is not a problem to me either.” See: Cogent rates the top fund wholesalers to RIAs, and all advisors, and the 'sales’ units at DFA, PIMCO, BlackRock and Franklin Templeton stand out.
Despite PIMCO’s poor performance, Peter Wright, an advisor with Wright Benefit Strategies Inc. of Vernon Hills, Ill., is sticking with PIMCO. “He is using treasuries which are extremely safe. You have your core holding of buying distressed treasuries. That’s a great strategy.”
Wright’s firm manages about $140 million in assets.
Gross has been playing defense since his heir apparent, co-chief investment officer Mohamed El-Erian left in January and his popular Total Return fund lost $50 billion in the last year. But Gross still seems to have overwhelming support of advisors who clamored to hear what he had to say at the annual Morningstar conference.
For years, Gross has been hailed as the bond king and has taken credit for the tremendous results his firm has generated. But that all changed when interest rates tanked, putting into question whether advisors can ever snare “real income” for clients. After adjusting for inflation and taking out management fees, bonds are now mostly a way of hedging an equities portfolio. See: Why the Yale endowment model has potentially calamitous pitfalls according to … Yale itself.
Gross is constantly in the public eye thanks to his television appearances and prolific blog. But advisors can’t seem to get enough of him, says Wright, who works with a number of 401(k) plans. His view is that PIMCO is the perfect choice for 401(k) plans.
“I can’t find another fund with as consistent performance as PIMCO and the type of strategy that PIMCO has,” Wright says. “Even though they don’t disclose the strategy, I think it’s clear it’s a smart strategy. I could go for a higher yielding fund, but I’ve got to take on more risk.” See: The Grossian formula for PR: Why Bill’s press is good press, even when it’s bad.
'Nowhere to hide’
Gross wasn’t the only fixed-income manager making openly concerned statements at the Morningstar conference. During another session, several bond managers vented.
“There’s nowhere to hide,” said Bill Eigen, the head of absolute return and opportunistic fixed Income strategies for J.P. Morgan Asset Management, “I’m focusing on avoiding rate risk. That’s my focus now.” See: What plunging equity prices say about bonds as a hedge for stocks.
Eigen believes the bond market will get worse before it gets better.
“I’m not waiting for the cops to come find me,” he said drawing a laugh from the audience. “I’m not overstaying my welcome. You know with fixed income when it’s about it. You don’t know that with equities. The math is screaming to me to be extremely conservative. I’m raising cash. I’m going to lie in wait. When the spring is decompressed it’s going to spiral out of control. That’s why I’m holding quite a bit of liquidity right now.”
The bond market has been a growing disaster for more than a year as big, unmanageable forces hold sway. The Federal Reserve has been on a mission of slashing interest rates to new record lows for the last six years. Since 2008, the Fed funds rate has been hovering at and around zero. See: In search of alternative income solutions in the current low-yield environment.
The lack of yield and that has encouraged investors to buy riskier long-term debt, creating a bull market in long bonds. Mutual fund holdings of corporate debt was more than $7 trillion as the end of 2013, up 109% from 2008.
Making matters worse is that many of these funds are heavily leveraged because investors borrowed on the short end to buy on the long end. This has artificially created bigger yields in an otherwise low-rate environment.
The income fallacy
Because the bond market was so strong for so many years prior to this reverse, many managers don’t know how to respond to this downturn, says Mark Egan, managing director and lead portfolio manager for Kansas City-based Scout Investments. See: Why the only thing bigger than the bond bubble is the bubble of bond doom-sayers.
“A 30-year bull market makes people lazy,” Mark Egan said at the Morningstar conference in a forum with other bond managers. “I’m holding cash because I think it will hold value. Why would I want to invest in something else? If I’m going to be fully invested then I’ve got to get out of this business and you should fire me. When I’m holding cash, I’ll look more like my benchmark. The problem is when the rates go up, you lose a lot of money. Last May and June serve as a real reminder of what happens when the market is wound too tight.”
Bond managers had no comfort for advisors who are still trying to find solid income streams for their retired clients.
“The idea of income is a fallacy,” says Bill Eigen, head of the Absolute Return and Opportunistic Fixed Income Group at J.P. Morgan Asset Management. “There’s no free lunch with fixed income. There’s no room for margin errors. Yield is a by-product of what we do. Our yield keeps coming down and down. For someone who is 87, maybe she doesn’t mind if she gets principal. It varies for each individual scenario. I assume my average investor can’t lose principal.” See: Just what good Bob Reynolds’ purchase of J.P. Morgan’s billions — sans sweet brand — will do for his Great West-Putnam 401(k) empire.
PIMCO brain trust
At the same bond manager panel, Mohit Mittal, managing director and portfolio manager in the Newport Beach office of PIMCO, said investors must lower their sights.
“Sadly, you have to lower expectations. Returns from fixed income will be much lower. That’s the first thing I’d tell a client.” See: Five steps to get your clients out of bonds and into alternative, low-volatility investments.
Mittal also reminded advisors that PIMCO is made up of many bright minds in addition to Gross’s.
“You’re not buying a single person. You’re buying PIMCO’s very best ideas.”
Plenty of meat
But even so, on the public relations side of the ledger, the company, long accustomed to a front-runner-fueled strategy, is hemorrhaging goodwill.
“Gross is getting extremely defensive,” Lahita says. “He stopped putting out the right messages and just started reacting and started playing defense and got pulled off his game. He seems to have taken this say-anything approach. He’s talking about his age. It’s so bizarre that it doesn’t feel right.”
But despite the PR miscues, in his Thursday speech Gross clicked into gear when he offered his high-level analysis of the bond market — albeit sprinkled with remarks about past glories. See: The Grossian formula for PR: Why Bill’s press is good press, even when it’s bad.
For instance, Gross explained that he feels his firm’s strategies add about 75 alpha points to its funds. In manager speak, this means how well a fund performs relative to its peers.
“It’s not hard to win a race if you start with 75-yard lead. It depends on the race. Over time, the Total Return Fund can and has competed against high-yield horses because of the structural template even though you don’t see that in the press.”
Chief prognostication officer
Even though Total Return Fund is underperforming as of mid-June, and is $50 billion lower than one year ago, Gross still feels things are moving upward.
He also talked a great deal about “the new neutral,” which seems to have replaced his old byword, “the new normal.”
In the new neutral, the game is to figure out what the new fed policy rate will ultimately play out going forward.
“One thing PIMCO knows is that the new neutral is not minus 1.25% which is where we are now,” he says. “In the past, we had a real rate that was so high it broke us. To return to a 2% real policy rate would be a real disaster. We’re still a high-levered economy.”
Closer to zero
Gross said doesn’t envision the rate rising to 2% but the Federal Reserve has signaled that its leaders think the rate could go as high as 2%. See: How interest rates have rolled since the first Thanksgiving and why the 'new normal’ under Yellen seems destined to last.
He predicts this new neutral will mean very low real policy rates for three to five years, which means a continued low return to most investors.
“The new neutral is critical. Is it two or zero? What should it be? PIMCO thinks zero and the Fed thinks it is 2%,” Gross said. “If the Fed and other central banks stay low, then the new neutral is closer to zero than two.”
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