Bill Gross lives and works 3,000 miles away from Wall Street. And it just may have been that distance from the world's financial capital that enabled Gross and his colleagues at Pacific Investment Management Co. to anticipate what few saw coming: the housing crisis.
Pimco's flagship Total Return Fund had a 10-year annualized total return of 7.7% for the decade, according to Morningstar, with similar performances from its three- and five year funds. Gross’ Harbor Bond is also a current Morningstar [MORN] Analyst Pick.
The performance of the Total Return Fund is all the more impressive considering its size. By the end of 2009 it reached just short of $202 billion, making it not only the world’s largest bond fund, but the largest mutual fund overall. American Funds Growth Fund of America, which accounted for "only" $156 billion, comes in a distant second.
Karen Dolan, the director of mutual fund analysis for Morningstar, said Gross' success is in large part the result of his ability to translate the broad universe of moving parts into something investible. "What has set Gross apart is his ability to understand the macroeconomic environment," she said.
Whereas indexes and benchmarks are the standard tools for most fund managers, Gross considers a myriad of factors in his investment decisions. The result is an impressive track record for calling interest rates, not to mention fluctuations in the bond sector and foreign exchange markets. That’s why Gross, Morningstar's fixed-income portfolio manager of the decade, was able to anticipate the housing crisis, which was caused in part by Wall Street's collective myopia.
The "Gross Lesson" demonstrated the dangers of focusing on a narrow area of coverage, as well as the lucrative benefits of studying the interdependency of the world's financial markets. This has made him, and by extension Pimco, contrarian by default. While a frightened world gobbled up Treasuries amidst the financial crisis, Gross took the opportunity to pick up the government-supported shares of companies that were 'too big too fail' such as Citigroup [C] and American International Group [AIG].
Gross, a perennial critic of Fannie Mae and Freddie Mac, also created a windfall profit for his fund when he bet against the semi-government mortgage giants.
Gross, who founded Pimco with two partners in 1971 and serves as its managing director and co-chief investment officer, has also excelled at surrounding himself with top-notch talent.
“His ability to bring together very intelligent people makes him better, and ensures that Pimco can continue to be strong over time, with or without him,” Dolan said. This is exemplified by Mohamed El-Erian, Pimco's chief executive and co-chief investment officer, as well as others such as Michael Gomez, co-head of the emerging markets portfolio management team, and Paul McCuelly, Pimco’s general manager.
So what does the future hold? Gross has said the post-crisis era will be one of slower growth and lower returns, calling it the "new normal."
"Diminished growth, deleveraging, and increased government involvement will temper profits and their eventual distribution to investors in the form of dividends and interest," Gross said in his December investment outlook.
Gross also warned of the trappings of .01% yields on cash. Aside from offering the investor next to nothing, he warned of the formation of bubbles in gold, oil and other assets.
Obscenely low rates is a major reason why Pimco is moving its way into equities, with a special interest in utilities. As Gross sees it, utilities, and close relatives like telecom companies yield between 5% and 6%, while long-term bonds bring about less, though with a higher tax rate.
"In a low growth environment," Gross wrote, "it seems to me that a company's stock should yield more than its less risky debt, and many utilities provide just that opportunity."