Bill Gross pioneered the “total return” strategy in the 1980s that revolutionized the once-sleepy bond market.
Now the co-founder of Pacific Investment Management Co., who was ousted in 2014, says many of the funds bearing the name are failing to live up to their mission after suffering heavy losses this year.
Instead of helping to cushion the market downturn, they’ve clung to their benchmarks too closely, essentially becoming “quasi” index-tracking strategies, according to Gross, who created Pimco’s Total Return Fund in 1987, which would eventually become the world’s largest mutual fund at its peak.
In an article published on his website Tuesday, Gross singled out the Pimco product and Jeffrey Gundlach’s DoubleLine Total Return Bond Fund, which have lost almost 17% and 14% this year, respectively. Their benchmark -- Bloomberg’s aggregate bond index -- has fallen 16% this year, as the Federal Reserve’s aggressive policy tightening exacted an unprecedented toll on bond investors.
“These total return funds are actively managed with the ability to go low in terms of maturity duration, but they all seem to be chasing ‘index-plus’ performance as opposed to ‘total return’ management,” Gross, 78, wrote. They “have lost their total return ‘charter,’ or vision, of what such funds should offer to investors in the form of capital preservation,” he added.
Individual investors choose these funds for their 401K retirement accounts, “believing that they will produce a defensive return in times of stress,” Gross continued. “They have been misled.”
Agnes Crane, a Pimco spokesperson, declined to comment. On the firm’s website, it says the total return fund “seeks maximum total return, consistent with preservation of capital and prudent investment management.” The fund has limits on how much it can overweight or underweight duration, a measure of interest-rate risk, relative to the index. Earlier this month, Pimco brought in chief investment officer Dan Ivascyn to the management team of the Total Return Fund, after Scott Mather, one of the firm’s longest-tenured executives, took a personal leave of absence.
A spokesperson at Doubleline didn’t respond to Bloomberg requests for comment.
Before Gross started the fund, fixed-income investing was dominated by the buy-and-hold strategy. Instead of sitting back and picking up steady interest payments like his peers did, Gross took active positions in duration, yield-curve moves, credit risk, volatility and derivatives. The strategy helped the fund consistently beat its benchmark over the following decades and cemented Gross’s status as the bond king.
That success came to an abrupt end in 2014 when Gross left Pimco following an acrimonious fallout with other executives. The total assets of the Pimco fund has plummeted to $56 billion, from a peak of $293 billion in 2013.
Gross jumped to the firm now known as Janus Henderson Group Plc, and after failing to replicate his earlier success at Pimco, he retired from asset management in 2019.
In the essay, the legendary investor conceded that his reign at Pimco was bolstered by a four-decade bull market in bonds that ended as the Fed embarked on its fastest policy-tightening campaign since the 1980s. But Gross also claimed that “non-index strategies” set him apart, citing success in navigating the global financial crisis.
Gross acknowledged that even a low-duration fund would have struggled this year as bond yields surged. “But -15%?” he lamented. What should a total-return fund have done? “This year, a 2% average yield could have been bolstered by defensive credit and yield curve strategies that were alpha generating,” the investor wrote. “My suggestion? Change their names, or perform their original mission of returning current bond market yields plus alpha from non-durational sources.”
Instead of a total return fund, lower-cost exchange traded funds investing in inflation-protected bonds, such as iShares 0-5 Year TIPS Bond ETF (STIP), would be a better option for investors, according to Gross.
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