Well before his departure from PIMCO (which he cofounded) and his dismal final act at Janus Henderson I voiced hesitations with the use of Gross' Total Return Bond Fund as a core bond holding (which was how it was marketed, and the fund was often the only or one of only a few bond fund choices in 401k plans) despite its admirable performance for most of Gross' tenure.
The reason was the lack of transparency in the fund. The mandate for the fund let Gross go anywhere in fixed income, making large bets on developments in the bond market across the globe frequently making use of options and futures and even delving into equity derivatives. Gross rode the huge bond market rally as interest rates reached historic lows (see below price moves inversely to yield) it no doubt gave him a tailwind to his returns . His track record faded just as the Federal Reserve was ending its era of zirp (zero interest rate policy).As assets in the fund left in response to poor performance Gross left Pimco in amidst a messy breakup.
At Janus Henderson he managed an Unconstrained bond fund which as the title suggests let him take big bets across markets including significant positions outside the stock market, The fund failed to deliver
His unconstrained fund lagged the aggregate bond index by 1.6 percentage points a year from October 2014 through January, despite that Gross took more risk relative to the broad bond market than he had as a total return manager (a standard deviation of 3.5 percent for the unconstrained fund compared with 2.8 percent for the index).
One commentatorr had an interesting view on Gross's strategy in the last round of his career: that he had the right idea but just bad results...wrong for the right reasons" I couldn't disagree more.
Bill Gross Misfired at Janus. But He Had the Right Idea.
Active managers need to make risky wagers, even if they could go bust.
As I’ve said repeatedly about stock pickers, investors no longer need a bond manager to tinker around the edges of the bond market. There’s a growing number of low-cost index funds that mimic total return bond funds by delivering modestly more credit risk than the broad market with similar average maturity. Many of those index funds are relative newcomers, so they don’t yet have a long performance history. But there’s no reason to believe they wouldn’t perform at least as well as total return bond funds, particularly given their lower cost.
To the extent that investors need a bond manager, it’s to make the kind of unconstrained calls that Gross made at Janus Henderson, knowing full well that those calls could be a bust just as easily as a boon. You can’t get that from an index.
I would agree to a limited extent bond investors no longer need an active fund manager that strays little from the overall bond market. But they hardly need to allocate the bond portion of their portfolio _- which should be the most stable part of their portfolio- to a non transparent hedge fund type vehicle which could be anything from Treasury bonds to bets on the spread between Turkish and German Government bonds.
Investors are far better off allocating their bond investments across ETFs which are transparent as to the maturity, credit rating and geography of their bond investments. They don't need an active bond fund manager either with a conservative mandate of an "unconstrained" strategy.
Betting on manager skill in a hedge fund type vehicle is no more likely to be a road to investing success than in equities. As the headline implies he could go bust...not a pretty outcome...even more so for the part of an asset allocation which is to be the more stable: the bond side.
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