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:
|Total Return Fund
|Barclays US Aggregate
|2014 (thru 9/26)
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.