(Bloomberg) -- Bill Gross, who built a career and a $1.9 billion personal fortune trading bonds, is trying to go short on credit, a position that he said runs contrary to his instincts and training as an investor.
Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said he is moving to sell credit risk and insurance on market volatility rather than buying long-term debt, because he believes a day of reckoning will come when central banks will no longer be able to prop up asset prices and investors will withdraw from markets.
"It's really hard to change your psychological makeup and to be a hedge manager that is comfortable with being short," he said in an interview with Bloomberg's Erik Schatzker. "I'm working on it, because I'm an investor that ultimately does believe in the system, but believes that the system itself is at risk."
Central bankers, seeking to stimulate economies, have lowered rates below zero in Europe and Japan, driving down returns on national debt, while investors seeking higher yield have pushed up the value of other credit. Stimulus from central banks worldwide has artificially pushed up values of stocks and credit, which has made Gross cautious on such assets, he said.
Eliminating credit as an investment means "not buying stocks, not buying high-yield bonds," Gross said. "It means going the other way, which comes at a price."
The U.S. Fed Funds target rate is between 0.25% and 0.5%. Eventually, central bankers will have to raise rates to reward individual savers, insurance companies and other investors who depend on fixed-income returns, or the economy and markets will suffer, according to Gross.
The Fed will boost the rate in June and should continue a gradual path of increases, Gross said. Since last week when the Fed released minutes of an April meeting indicating the economy has strengthened enough for a rate increase, the probability of a hike at the June 15 Federal Open Market Committee meeting has climbed to 34%, according to futures information compiled by Bloomberg.
"They should move gradually, there is no significant inflation," Gross said during an interview taped before his appearance at a fixed-income seminar sponsored by Bloomberg. "The gradual pace, which has been on their plate for years now, is really the first requirement. But if it's too gradual, then ultimately 5, 10, 15 years down the road, savings investment and the economy itself suffer."
Gross co-founded the Pimco in 1971 and built a career during a period of falling interest rates, which made shorting debt a losing bet. He led the Pimco Total Return Fund to become the world's largest mutual fund before investors started withdrawing money in 2013. In September 2014, he was ousted from the firm and jumped to join Janus.
The Janus unconstrained fund has advanced 2.6% so far this year, outperforming 70% of its peers, according to data compiled by Bloomberg. It has returned 1.7% since Gross took over management in October 2014. About half of the fund is Gross's personal money.
The fund, which Gross co-manages with Kumar Palghat, invests in fixed-income and derivative instruments. It has an effective duration of 1.13 years, a short-term position that aims to reduce exposure to losses if rates rise.
It's becoming increasingly difficult for money managers to justify their fees or their jobs, Gross said.
"I know that my investors want three, four, or 5%, or else they can keep it in the bank or stuff it in their mattress," he said.