By Sam Forgione and Jennifer Ablan
NEW YORK, April 3 (Reuters) - Bill Gross, manager of the
world's largest bond fund, said on Wednesday that the Federal
Reserve's aggressive monetary policies may have changed the
landscape so greatly that investors like himself and Warren
Buffett may face radically new challenges in trying to maintain
their track records.
Gross, who oversees the $288 billion PIMCO Total Return Fund
and is co-chief investment officer of its parent
company, Pacific Investment Management Co., said the aggressive
monetary policies of the Fed as well as other longer-term
structural shifts in demographics, geopolitics, and/or commodity
supplies could make life harder for investors.
In his April letter posted on PIMCO's website, entitled "A
Man in the Mirror," Gross said that since the early 1970s when
credit began its "incredible, liquefying, total return journey
to the present day, an investor that took marginal risk, levered
it wisely and was conveniently sheltered from periodic bouts of
deleveraging or asset withdrawals could, and in some cases, was
rewarded with the crown of 'greatness.'"
"What if perpetual credit expansion and its fertilization of
asset prices and returns are substantially altered?" Gross
asked. "What if zero-bound interest rates define the end of a
total return epoch that began in the 1970s, accelerated in 1981
and has come to a mathematical dead-end for bonds in 2012/2013
and commonsensically for other conjoined asset classes as well?"
Such a scenario could potentially cause asset prices to
decline instead of rise, Gross said, who is often referred to as
the "Bond king." He helps oversee more than $2 trillion in
assets at PIMCO.
Gross previously has said that the Fed's monthly purchases
of $85 billion in Treasuries and agency mortgage securities have
propped up assets on just about everything, including stocks and
bonds, resulting in their being overpriced. To keep performance
high, some managers have gone beyond their comfort zones and
expertise, taking on too much risk.
"What if there is a future that demands that an investor - a
seemingly great investor - change course, or at least learn new
tricks? Ah, now, that would be a test of greatness: the ability
to adapt to a new epoch," he said on Wednesday.
"There is not a Bond King or a Stock King or an Investor
Sovereign alive that can claim title to a throne," Gross said.
"All of us, even the old guys like Buffett, Soros, Fuss,
yeah - me too, have cut our teeth during perhaps a most
advantageous period of time, the most attractive epoch, that an
investor could experience," he said, referring to investors
George Soros and Dan Fuss.
Gross admitted that his measured risk-taking method did not
work well for a few months in 2011 when he underestimated the
contagion effect from the European debt crisis and the U.S. debt
ceiling budget battle. That year, he bet against U.S.
Treasuries, which were one of the biggest outperformers of 2011.
Gross on Wednesday said of his risk exposure: "It didn't
work too well for a few months in 2011, nor in selected years
over the past four decades, but because credit was almost always
expanding, almost always fertilizing capitalism with its
risk-taking bias, then PIMCO prospered as well."
In 2012, Gross made a huge comeback with his prescient bets
on mortgage-backed securities. The Total Return fund posted
returns of 10.36 percent, more than double that of the benchmark
Barclays U.S. Aggregate Bond Index.
Gross, on Wednesday, said: "Investors should be judged on
their ability to adapt to different epochs, not cycles."