Bill Gross's Successor Scraps Go-Anywhere Strategy in Turn to Safety

(Bloomberg) -- Nick Maroutsos is trying to succeed where legendary bond manager Bill Gross couldn’t.

Maroutsos, 42, took over this month as lead manager of what’s been renamed Janus Henderson Absolute Return Income Opportunities Fund, the $915 million fund Gross steered from October 2014 until his retirement. The fund, formerly known as the Janus Henderson Global Unconstrained Bond Fund, underwhelmed during Gross’s tenure.

A native Southern Californian, Maroutsos went to work for Gross at Pacific Investment Management Co. in 1999. He was sent to Australia in 2002 and quit Pimco to co-found Kapstream Capital, which Janus bought in 2015. In addition to managing about $10 billion for Kapstream, Maroutsos is co-head of global bonds for Janus Henderson Group LP. Here are highlights from an interview at his office in Newport Beach, California.

Q. Why the name change?
A. “Unconstrained” is synonymous with Bill and his time here at Janus. But for us, “Absolute Return” is at the core of what we do. The other thing I’d stress is that we’re a team entity, not a single manager.

Q. Gross still owns a majority of the fund. What’s he going to do with his money?
A. We are anticipating him taking out his money at some time. That’s what he’s told us. The time frame we don’t know yet. We’d love for him to keep it in.

Q. How would you describe the fund’s absolute-return strategy?
A. Unlike unconstrained, this portfolio is going to focus exclusively on fixed-income assets. We’re not going to be allocating to commodities. We’re not allocating to equities. We’re looking to hit singles and doubles. We’re not going to be that massive return generator. We’re going to be your risk reducer. We run an ETF we call “Vanilla,” where you can see what we’re doing.

Q. That’s the Janus Henderson Short Duration Income ETF -- ticker VNLA -- an actively managed exchange-traded fund with more than $920 million.
A. People can use us as an alternative to cash, as a compliment to core or as a core allocation in short duration.

Q. So what are your top investments?
A. Our competitive advantage lies in being able to find assets and opportunities in the global marketplace. When you look at our strategy, there’s going to be double-digit countries represented -- Australia, New Zealand, Canada, U.K., U.S., parts of Asia including Singapore, Hong Kong and China. So you have a diversified portfolio.

Q. What do you need to do to change the mutual fund portfolio?
A. We’re pretty much already there since the change in management was announced in February. We split our portfolio into a core as well as an alpha. The core is corporates, mortgages, governments, local in nature, hedged back to the base currency, that give us some level of income. That’s complemented with the alpha component, which looks to take advantage of market mispricings and dislocations, but more importantly looks to hedge out risks.

Q. You have a lot of exposure to Australia. Why?
A. It’s a factor of not only having boots and expertise on the ground, but also because the return optics are very good and they have been for some time. The Reserve Bank of Australia, the central bank, is very transparent in terms of their policy and what they plan to implement. The Australian economy has benefited from the level of growth they’ve had over the last couple decades. Much of that as a result of its close ties with China.

Q. What else do you like?
A. Asia ex-Japan. Owning hard-currency debt of issuers in countries like China, Hong Kong, Singapore, Malaysia. In many cases, these are partially or wholly owned entities, like state-owned enterprises. Korea Electric Power, for example. They issue U.S. dollar-denominated bonds. It’s a way of leveraging into the growth of the region without taking too much emerging-market or local-currency risk.

Q. What are you avoiding?
A. We don’t see a lot of opportunity in owning European assets. We don’t see any yield advantage. Credit spreads are tight.

Q. What’s your view of Brexit?
A. We’re watching it as a source of volatility. We’re buying volatility protection as a hedge against spikes up or down in interest rates as well as currencies. We’re using sort of these geopolitical events as opportunities to buy some insurance for the portfolio.

Q. What’s your outlook for U.S. rates?
A. One of our core trades for 2019 is we expect the yield curve to steepen as a result of the Fed easing off the pedal for future rate hikes, which they’ve pretty much already done, and pricing in future rate cuts, most likely in 2020. There’s a possibility it could happen earlier. I think the next move from the Fed will be down.

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Josh Friedman, Vincent Bielski

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