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Thursday, May 28, 2015

Those Go Anywhere Bond Funds...You REALLY Don't Know What You Own

I have written before that "go anywhere" or "unconstrained" bond funds are essetially bets on the "genius" manager. Bill Gross once manager of the (then) world's largest bond fund Pimco Total Return Fund ran into a period of poor returns which (predicatbly) let to outflows from the fund and his subsequent departure from the firm.

He landed at Janus Capital with a new fund. And he continued his style of making many bold statements which seemed to indicate how he was positioning his fund.

In April with the yield on 10 Year German Government Bonds (BUNDS) trading at the rock bottom yield of .10% Gross tweeted and spread the word all over the media that going short Bunds was the trade of a lifetime". Such a short would profit from a rise in German rates (fall in price). Sure enought rates on the bonds rose to .64% over the next month.

Following those pronouncements by Gross investors in his Janus Global Unconstrained Bond Fund would likely have been expecting the fund to rack up some nice gains as a "short position in the Bunds would have been quite profitable.

It didnt turn out that way. As Bloomberg reports

Bill Gross acknowledges doing a poor job of implementing his recommendation to bet against German government bonds.
“My famous (infamous?) ‘short of a lifetime’ trade on the German bund market was well-timed but not necessarily well-executed,” Gross wrote in his June investment outlook for Janus Capital Group Inc. “Still, it was a prime example of opportunities hatched by the excess of global monetary policy.”
Gross, who runs the $1.52 billion Janus Global Unconstrained Bond Fund, advised selling short the 10-year German bund on April 21, when it yielded about 10 basis points, or 0.1 percent. Over the next month, yields climbed to 64 basis points as prices fell, vindicating Gross’s prediction. Yet his Unconstrained fund lost 2.5 percent in that period as he wagered German bunds would trade in a narrow range instead of betting all-out against the debt, data posted on Janus’s website show.
Looking at the graph below one can only imagine the frustration of an investor who invested in the Janus fund based on faith in Gross' portfolio management skills. The public market call he made was nearly perfect...yet he didnt make money on the trade. "Poorly executed" is  perhaps an understatement
10 Year German Government Bond (Bund) Yield
Gross explains his trade and his view on the markets in an interview here

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