(or Treasury Bonds)
June 10, 2011
The savers’ game
In this repressive environment, how will savers and investors protect themselves from upcoming inflation? In the likely absence of guaranteed low interest rates, it is safest to steer clear of Treasuries, Gross advised.
From all the discouraging prospects through which Gross waded in delivering this address, one clear message emerged: Go global! The signs are clear and the alarms are loud.
Gross sees the most opportunity in bond markets abroad, and he reminded the audience that “Treasuries are only half of the market.” He urged investors to look abroad for opportunities in less repressive countries. While much of the developed world suffers from the same malaise as the US, there are a few bright spots on the horizon, and he foresees a world in the near future in which historically riskier emerging markets offer much more reasonable returns.
Gross pointed immediately to Brazil, which offers real interest rates of 6% to 7%, although he acknowledged that the country’s history of default might give many investors pause. As a somewhat safer alternative, Gross suggested Canadian, German, or even Mexican bonds.
Gross’ other suggestion was US dividend-paying stocks, like Coca Cola, Proctor and Gamble, Johnson and Johnson, and utility stocks. Those securities, unlike Treasury bonds, offer positive real yields, and he said the chance that any of those high-quality companies would reduce its dividend is remote.
The long-term outlook
The future looks bleak in the US, from Gross’ perspective. He confidently declared that in 15 years’ time investors who remain in the US will have had their pockets picked by the government’s financially repressive policies. Furthermore, he predicts the political process will have stalled efforts to reinvigorate the country’s long-term prospects by bolstering infrastructure and education.
In light of Gross’ broader message, though, investors in PIMCO’s flagship Total Return fund, which is now the largest mutual fund in the world, should take caution.
The Total Return Fund’s investors have been richly rewarded since Gross founded it in over 20 years ago, and while much of that growth can be attributed to skillful active management, Gross on Wednesday was very clear: It’s been the decline in real interest rates that has driven total return.
“If real interest rates can’t be driven down further, what total returns can investors expect?” he said.
The fact that Gross is turning to non-US markets and away from Treasury bonds in his fund indicates that, at best, his investors will be exposed to greater currency and default risk. At worst, real rates will increase faster and sooner than most expect, reversing the trend that has so generously rewarded his investors.
Sam Parl is a reporter with Advisor Perspectives.
For more information, please contact Advisor Perspectives at 781-376-0050.
Display article as PDF for printing.
Would you like to send this article to a friend?
Remember, if you have a question or comment, send it to .
