“If we can’t make money on pure bonds, let’s make money on these other things,” Bill Gross says. Image: Bloomberg

(Bloomberg) -- Bill Gross is wrapping up his best quarter since taking over the Janus Global Unconstrained Bond Fund.

The fund has returned almost 2% this year and ranks in the top 11% of his Morningstar peers. While three months is a brief record for mutual fund managers, Gross said his performance bodes well in the trading arena he dominated for decades at Pacific Investment Management Co., prior to his September 2014 ouster.

“I know if you can put together a succession of 16-month periods in the top 75% that over 5 to 10 years to 15 years, you’re going to be in the 99th percentile,” Gross, 71, said during an interview last month in his 14th-floor office in Newport Beach, California.

After jumping to Janus Capital Group, the fund manager said in March 2015 that he had two to four years to prove that he could still beat the competition. He’s outperformed in 2016 by holding emerging-market securities that others shunned, and by writing income-producing swaps contracts to spice up returns in an era of low or negative interest rates.

The fund, which Gross co-manages with Kumar Palghat, had an effective duration of 1.13 years at the end of February, a short-term stance that he said protects against interest-rate movements while exposing him more to credit, currency and volatility risk.


“If we can’t make money on pure bonds, let’s make money on these other things,” Gross said.

The fund has benefited from a recovery in hard-hit developing markets. Thirty-six percent of assets were in emerging markets as of Feb. 29, mostly Latin American debt, according to the Janus website. The top 10 positions included the sale of credit default swaps to protect against swings in Brazilian and Mexican debt.

Gross sold similar short-term swaps this quarter for oil investors worried about the price of crude falling below $25 a barrel, he said in an e-mail. Under his swaps-selling strategy, the protection only pays out if “a 3 or 4 standard-deviation event occurs -- sort of a gray swan,” he said, a distinction from the ultra-rare events known as black swans.

Swaps contributed to Gross’s biggest losses last year, when the German bund “went a little crazy” in April and the U.S. stock market plunged in August, events he compared to selling insurance before a 7.0 earthquake in San Francisco.


“Sometimes it didn’t work,” he said.

Gross, who co-founded Pimco in 1971, declined to discuss his former employer, which he alleges in a lawsuit pushed him out to avoid paying a $200 million bonus. The fund company calls the claim, which a judge allowed to proceed this month, baseless and says it expects to prevail.

Pimco’s headquarters can be seen outside the manager’s window, beyond the six computer screens on his desk. Its $5.1 billion Pimco Unconstrained Bond Fund was down 0.5% in 2016 through Wednesday.

“I’m obsessed with beating everybody,” Gross said in the interview. “I’ve got my list of 50 competitors and I’ll be damned if I don’t look at every one of them.”

Bonds worldwide this year are off to their best start since at least 1996, up 3.1%. Gross’s unconstrained fund has returned 0.8% since he assumed management, ranking in the top 20% of its Morningstar nontraditional bond peers.

Even as performance has improved, clients haven’t followed, leading to four straight months of net redemptions at the unconstrained fund through February. After climbing to a peak of $1.52 billion last April, the fund shrank to $1.26 billion at the end of February, with more than half of the assets coming from the billionaire’s personal fortune.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.