Cast your mind back to October last year and fixed income markets were reeling from two major pieces of news: weaker than expected US economic growth and the shock exit of bond guru Bill Gross from PIMCO.
The news of his acrimonious departure from the business he helped found in 1971 and forge into one of the biggest bond houses in the world was quickly followed by word that he was to join Janus Capital and a wall of money followed Gross to the Pimco exit.
More than $120bn flowed out of Gross’ largest portfolio, the Pimco Total Return Bond fund, although only a small fraction ended up in his new vehicle, the Janus Unconstrained Bond fund.
According to FE Analytics, the three years up until Gross’ departure two of his most well-known portfolios – Pimco Total Return Bond and Pimco Unconstrained Bond – had been mixed.
The pair were just in positive territory and the former was ahead of its benchmark, the Barclays US Aggregate index, but behind their peers over this period. We’ve used the ‘GIS’ mirrors of the funds for the data, which are the ones accessible to investors on this side of the pond.
Performance of funds, sector and index 3yrs before Gross’ exit from Pimco
Source: FE Analytics
Gross, who is now suing Pimco for $200m, clearly had a fall out with his former peers which was a driving force behind his move to Janus Capital.
Since he joined his now home, Gross has launched the Janus Unconstrained Bond fund and has underperformed the $8.1bn Pimco GIS Total Return Bond but has beaten the $3.8bn Pimco GIS Unconstrained Bond since.
Performance of funds, sector and index since Gross’ exit from Pimco
Source: FE Analytics
However, the period of sell-off in August, which saw markets tumble on ‘Black Monday’, has been positive for Gross, who has since beaten the index as well as the two Pimco funds mentioned previously.
Performance of funds, sector an index since Black Monday
Source: FE Analytics
This may be evidential of his strategy in his new portfolio, which seeks to make positive returns throughout different market environments and periods of the business cycle. Therefore it is arguable too short a time period to judge the fund, with it being just a year old.
It has an ‘unconstrained’ mandate, being not tied to a specific benchmark, and therefore a substantial leeway to buy and sell opportunities across the fixed income spectrum.
The portfolio Gross has constructed is very varied with a variety of assets across risk, regions and duration. However, the US is still his largest regional exposure followed by Mexico and Brazil.
A noticeable difference between the portfolios is the lower duration in the Janus fund, 4.5 years versus 4.3 years in Pimco GIS Total Return Bond and -0.93 years for Pimco GIS Unconstrained Bond.
This reflects Gross’ belief that real interest rates are effectively going to be held close to zero for some time, following the Federal Reserve’s decision to not raise interest rates in September, as many had been supposing, due the apparent weakness in Chinese economic growth.
The manager thinks this is a wise course of action by the Fed, recently saying it will take many years for the global economy to return to normal following quantitative easing and low interest rates, although he is sceptical about the long-term merits of zero-bound interest rates.
“Zero-bound interest rates destroy the savings function of capitalism, which is a necessary and in fact synchronous component of investment. Why that is true is not immediately apparent. If companies can borrow close to zero, why wouldn’t they invest the proceeds in the real economy?” he said.
“The evidence of recent years is that they have not. Instead they have ploughed trillions into the financial economy as they buy back their own stock with a seemingly safe tax advantaged arbitrage.”
“Zero [real interest rates] is never mentioned as a complicit accomplice, especially since inflation itself has averaged much the same. But models aside, there should be space in an economic textbook or the minutes of a central bank meeting to acknowledge the destructive influence of zero per cent interest rates over the intermediate and longer term,” he said.
Many market participants now agree that it is now less likely that interest rates will rise this year in the US because of the scepticism over the health of Chinese growth, shown by a rally in longer duration assets since the decision by the Fed last month.
Chris Iggo, chief investment officer of fixed income at Axa Investment Managers, says this will particular help high yield assets, which are Gross’ largest overweight.
“With relatively tight investment grade spreads the interest rate influence on total returns remains substantial particularly for longer duration exposures. For high yield this is less the case given wider credit spreads and typically shorter duration,” he said.
“We believe that we are still in a positive part of the credit cycle for high yield investing and that, even in the US, the spreads on offer compensate investors for what might be a slightly increased default trend in the next year or so.”