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Ritholtz: How Good Was Bill Gross?

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Last year was a time of change and controversy for Bill Gross: His unplanned exit from Pacific Investment Management Co. in September, a whisper campaign before the palace coup, a new job at Janus Capital. 

Amid all this, Gross is most upset about one thing: Despite 40 years at the top of the fixed-income world, he believes his recent track record has been misunderstood or misrepresented. 

After Bloomberg View published a column last year on his compensation at PIMCO, he wrote me to complain that his performance numbers were much better than reported, especially for PIMCO’s flagship Total Return Fund (PTTRX), the world’s biggest bond fund.

He wanted to know if Bloomberg was willing to look into the data and “set the record straight.” Since we splashed his 2013 bonus of $290 million all over the Internet, it seemed only fair to do so.

Hence, today’s column deals with three things: Total Return Fund’s performance during the past few years, the performance of the five closed-end funds Gross managed at PIMCO, and the strength of PIMCO as an asset gatherer, driven in large part by Gross, particularly since 2011. 

Some of what we discovered was surprising; some was as expected. One thing is beyond doubt: Gross’s impact at the firm he co-founded, in terms of performance and assets raised, was enormous. It is the reason Forbes decided to publish an article with the headline, “Why Bill Gross Is the Most Underpaid Money Manager in the World.”

The first inklings of trouble at PIMCO began when Gross made a wrong-way bet in February 2011 based on the Federal Reserve’s program of quantitative easing. QE was expected by many to cause faster inflation, sending rates higher and adding to the federal budget deficit. In anticipation, Gross eliminated holdings of U.S. Treasuries.

While his view wasn’t that exceptional, his decision was. Getting out of U.S. Treasuries was big, bold and, as it turned out, bad. At the time, 10-year Treasuries were yielding 3.48%. They soon fell to less than 3%, as bonds continued their epic 30-plus-year rally. Today, they yield less than 2%.

More than a few fund managers got this call wrong. But Gross was the most visible, and he managed the most money.

However, the perception that this trade “haunted” PIMCO isn’t supported by the data. Gross was particularly incensed by something Nobel laureate and New York Times columnist Paul Krugman wrote last year, soon after Gross left PIMCO:

Thanks to a spectacularly bad call Mr. Gross made in 2011, which continues to haunt the firm . . . Mr. Gross joined the deficit hysterics, declaring that low interest rates were “robbing” investors and selling off all his holdings of U.S. debt. In particular, he predicted a spike in interest rates when the Fed ended a program of debt purchases in June 2011. He was completely wrong, and neither he nor PIMCO ever recovered.

But the story doesn’t end there: PIMCO and the Total Return Fund actually both recovered and by July 2012 the fund had “not only recouped all the net outflows for the calendar year 2011 but then gained some,” the Wall Street Journal reported. Based on his long track record of outperformance, fixed-income investors were willing to give Gross the benefit of the doubt. At the end of 2010, PIMCO managed $1.24 trillion. By 2013, two years after the errant Treasury trade, assets under management had swelled 60% to more than $2 trillion.

Take that, Paul Krugman!

The performance of individual funds managed by Gross is a bit more nuanced. There are two different groups of managed assets, each run very differently: The Total Return Fund and five much smaller closed-end funds (CEFs).

Let’s start with the Total Return Fund: From 2011 until Gross left PIMCO, the returns were mixed. Here’s a table showing the fund performance versus the benchmark:

Year Total Return Fund Barclays US Aggregate
Total Return
2011 4.16 7.84 -3.68
2012 10.36 4.22 +6.15
2013 1.92 2.02 -0.10
2014 (thru 9/26) 3.32 4.06 -0.74

Source: Bloomberg

Not exactly the disaster depicted by some — though the returns weren’t what they had been in earlier years, when Total Return was consistently at the top of the fixed-income pack. More significantly, perhaps, the Total Return Fund wasn’t in the top-performance decile of its peers during these years, as it had been in the past.

Note that these numbers on their own are not the sort of performance that gets a legendary chief investment officer fired from the firm he co-founded.

As for the closed-end funds, Gross assumed management of most of them in 2009. At a billion dollars or less in assets, their size gave him much more flexibility. To get more insight, I spoke with Cara Esser, a CEF strategist at Morningstar, the fund-rating firm. She tracks the five CEFs that Gross managed right up until he left PIMCO.

They are:

PIMCO High Income Fund (PHK)

PIMCO Corporate and Income Opportunity Fund (PTY)

PIMCO  Corporate and Income Strategy Fund (PCN)

PIMCO Income Strategy Fund (PFL)

PIMCO Income Strategy Fund II  (PFN)

Esser’s reviews were glowing: “The performance under Bill has been really good.” How good? The funds averaged annual returns of 23% to 30% during Gross’s tenure. By comparison, peer funds averaged about 15% a year. These five funds were ranked in the Morningstar universe of multisector bond CEFs as Nos. 1, 2, 4, 5 and 6 for performance. That is simply stellar. 

The secret to Gross’s success? In the aftermath of the financial crisis, while other funds were dumping securities known as auction-rate preferreds, Gross quietly bought them at fire-sale prices.

Gross is especially proud of the PIMCO Corporate and Income Opportunity Fund. He personally owns almost 3.4 million shares, or a little less than 5%, of the fund as of the most recent Securities and Exchange Commission filing. Whenever people stopped him on the streets of Newport Beach, California, to ask him what they should invest in, this was the fund Gross mentioned. The fund trades at a 16% premium to its net asset value. Since the market bottomed in 2009, it has doubled in price, from $8 a share to a little more than $16. Add to that the 9.5% annual dividend yield and you have the makings of a terrific performer.  Since Gross’s departure as manager, however, Morningstar has lowered this fund’s rating from “bronze” to “neutral.”

As Bloomberg News reported last year, before Gross was forced out of PIMCO he proposed taking on a smaller role. He was willing to step down as CIO, hand over management of the Total Return Fund to a successor by the end of 2015, and continue running the closed-end funds.

Given how well the CEFs did under Gross and the billions of dollars in outflows from PIMCO since his departure, that looks like a missed opportunity. 

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