Bill Gross Misfired at Janus. But He Had the Right Idea.
(Bloomberg Opinion) -- Active bond managers could use more of Bill Gross’s swagger.
No sooner had the hall-of-fame bond manager announced his retirement on Monday than the financial press declared his downfall. The Wall Street Journal headline proclaimed “Bill Gross, Onetime Bond King, Retiring After Messy Last Act,” and another in the Financial Times read “How the ‘bond king’ Bill Gross lost his crown.”
That messy last act refers to Gross’s stint as manager of the Janus Henderson Global Unconstrained Bond Fund since 2014. Gross made some big bets at Janus Henderson that didn’t pay off, most famously a wager last year that rates on U.S. Treasuries and German bunds would converge, resulting in sagging performance for his unconstrained bond fund.
Even though Gross’s calls didn’t turn out the way he and his investors had hoped, Gross was right to bet boldly on his best ideas, and active bond managers would be wise to follow his example.
The pivot to unconstrained investing was a brave departure for Gross, who had spent the previous three decades perfecting the “total return” approach to bond investing with the Pimco Total Return Fund he founded in 1987. The strategy attempts to outpace the broad bond market by taking modestly more risk, often by buying lower-quality bonds than are reflected in broad-market bond indexes while targeting a similar average maturity.
No one did it better than the Bond King. The institutional share class of Gross’s total return fund outpaced the broad bond market, as represented by the Bloomberg Barclays U.S. Aggregate Bond Index, by 1 percentage point annually during his run from June 1987 to September 2014, a huge margin for a bond manager. And he did it with only modestly more risk, as measured by annualized standard deviation (4.3 percent for Gross’s fund compared with 3.9 percent for the index).
Gross was also shockingly consistent. His fund outpaced the bond market during every rolling 10-year period, and never by less than 0.5 percentage points a year. His average outperformance over all 10-year periods was 1 percentage point a year, and 44 percent of the time he won by a wider margin. During his best decades, he outperformed by more than 1.6 percentage points annually, a margin that rivals top managers in any asset class.
Given Gross’s mastery of the total return game, it was hardly necessary for him to stake his reputation on a late-career turn to unconstrained investing, a high-stakes strategy that calls for big bets. His run at Janus Henderson wasn’t the unmitigated disaster implied by the headlines, but Gross failed to re-create the market-beating magic of his Pimco days.
His unconstrained fund lagged the aggregate bond index by 1.6 percentage points a year from October 2014 through January, despite that Gross took more risk relative to the broad bond market than he had as a total return manager (a standard deviation of 3.5 percent for the unconstrained fund compared with 2.8 percent for the index).
Gross joked in an interview with my Bloomberg colleague Tom Keene on Monday that, “Maybe I should have stuck to total return and been a little more constrained.” That’s a classic case of Monday morning quarterbacking, or hindsight bias, as behavioral economists would say; the chatter around Gross would be entirely different if his unconstrained bets had paid off. Even so, I doubt Gross regrets his unconstrained adventure.
As I’ve said repeatedly about stock pickers, investors no longer need a bond manager to tinker around the edges of the bond market. There’s a growing number of low-cost index funds that mimic total return bond funds by delivering modestly more credit risk than the broad market with similar average maturity. Many of those index funds are relative newcomers, so they don’t yet have a long performance history. But there’s no reason to believe they wouldn’t perform at least as well as total return bond funds, particularly given their lower cost.
To the extent that investors need a bond manager, it’s to make the kind of unconstrained calls that Gross made at Janus Henderson, knowing full well that those calls could be a bust just as easily as a boon. You can’t get that from an index.
Gross knows all this as well as anyone, and I suspect that was a factor in his turn to unconstrained investing. As Gross leaves “this port for another destination,” as he put it in the press release announcing his retirement, he also leaves behind a valuable lesson for aspiring bond kings: Take more risk, not less.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
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