{"id":24476,"date":"2011-10-14T08:30:53","date_gmt":"2011-10-14T12:30:53","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/10\/14\/the-bond-king-does-an-about-face\/"},"modified":"2011-10-14T08:30:53","modified_gmt":"2011-10-14T12:30:53","slug":"the-bond-king-does-an-about-face","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/10\/14\/the-bond-king-does-an-about-face\/","title":{"rendered":"The Bond King Does an About Face"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a>Outside of Fed Chairman Ben Bernanke, Pimco founder and Co-CIO Bill Gross is the most influential man in the global bond market.\u00a0 When he speaks, investors listen.<\/p>\n

It\u2019s not for nothing that he is called the Bond King.\u00a0 His firm manages over $1 trillion in assets, and his flagship fund\u2014the Pimco Total Return Fund (PTTRX<\/a>)<\/strong>\u2014is the largest mutual fund in the world.\u00a0 Yet despite the fund\u2019s size and high profile (both of which make investing more difficult), Gross ranks in the top 1% of all bond funds in his category for the past 15 years.\u00a0 According to Morningstar, the Total Return Fund has generated annualized returns of 7.2 percent over that period.\u00a0 Not bad for a collection of boring, old bonds.<\/p>\n

Gross has had a rough go of it in 2011, however. (See \u201cEven the Greats Make Mistakes, Part II<\/a>\u201d<\/strong>).\u00a0 The Bond King swung big with a much-hyped short of U.S. Treasuries\u2026and struck out.<\/p>\n

As a result, Gross has vastly underperformed the competition year to date.\u00a0 The Total Return Fund has seen gains of just 1.9 percent, while the passive Barclays US aggregate bond index has enjoyed Gross-like returns of 6.7 percent.\u00a0 Gross ranks in the 91st<\/sup> percentile this year.\u00a0 This means that out of 100 bond fund managers, only 9 performed worse.\u00a0 Ouch.<\/p>\n

Even an investing demigod like Gross can have a bad trade.\u00a0 But what separates a truly great investor like Gross\u00a0 from the rest of the pack is his ability to dust himself off and jump back in.\u00a0 He doesn\u2019t let a bad trade\u2014and, in his case, the bad press that comes with it\u2014shake his confidence.\u00a0 He simply adapts to the new reality and moves on.<\/p>\n

So what is the Bond King buying today?<\/p>\n

Mortgages.\u00a0 Lots<\/em> of mortgages.\u00a0 And he\u2019s even borrowing money to do it.<\/p>\n

According to Reuters<\/a>,\u00a0\u00a0 Gross went on a mortgage buying spree in September, raising the Total Return fund\u2019s allocation to mortgage-backed securities to 38 percent in the belief that the Fed\u2019s Operation Twist will boost their prices.\u00a0 In the process, he increased the leverage of the fund from 9 percent to 19 percent.\u00a0 When Mr. Gross bets, he bets big.<\/p>\n

The move represents an abrupt U-turn for the Bond King.\u00a0 His main rationale for shorting Treasuries earlier this year was his belief that long-term rates were too low and that they\u2019d be rising once \u201cQE2\u201d was wound down.\u00a0 But in aggressively buying long-duration mortgage bonds\u2014and in using leverage to do it\u2014Gross clearly believes that low long-term rates are here to stay for a while.<\/p>\n

The Fed\u2019s recent commitment to Operation Twist is certainly one reason for Gross\u2019s bullishness towards long-dated bonds.\u00a0 But looking at the bigger picture, lower rates are consistent with what Gross and his colleague Mohamed El-Erian have dubbed the New Normal\u2014a prolonged period of sluggish growth and higher than usual unemployment.<\/p>\n

In his October investment commentary<\/a>, Gross identifies three \u201cstructural roadblocks\u201d that should help keep growth muted and inflation low for the foreseeable future:<\/p>\n

    \n
  1. The deflationary effects of globalization (Gross ties this to a populist argument about wage growth).<\/li>\n
  2. The deflationary effects of technology<\/li>\n
  3. Aging demographics that favor savings over consumption<\/li>\n<\/ol>\n

    If Gross is correct about inflation being benign\u2014and I believe that he is\u2014then investors should make income a major focus of their portfolios.<\/p>\n

    You could <\/em>go the route of Gross and buy long-duration bonds.\u00a0 But a better option might be to load up your portfolio with high-dividend paying stocks.\u00a0 Most importantly, make sure that the stocks you pick have a history of growing<\/em> or at least maintaining their dividends during even the most difficult economic conditions.\u00a0 If a company can raise its dividend in a year like 2008, it\u2019s likely to survive anything.<\/p>\n

    A few contenders for your portfolio:<\/p>\n\n\n\n\n\n\n\n
    Stock<\/strong><\/td>\nTicker<\/strong><\/td>\nDividend Yield<\/strong><\/td>\n<\/tr>\n
    Johnson & Johnson<\/strong><\/td>\n$<\/span>JNJ<\/a><\/strong><\/td>\n\n

    3.6%<\/strong><\/p>\n<\/td>\n<\/tr>\n

    Microsoft<\/strong><\/td>\n$<\/span>MSFT<\/a><\/strong><\/td>\n\n

    3.0%<\/strong><\/p>\n<\/td>\n<\/tr>\n

    Intel<\/strong><\/td>\n$<\/span>INTC<\/a><\/strong><\/td>\n\n

    3.7%<\/strong><\/p>\n<\/td>\n<\/tr>\n

    Altria<\/strong><\/td>\n$<\/span>MO<\/a><\/strong><\/td>\n\n

    5.9%<\/strong><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    All but Microsoft (NYSE: $<\/span>MSFT<\/a>)<\/strong> currently yield more than the 30-year Treasury\u2014which yields 3.15 percent at time of writing\u2014and Microsoft is awfully close.\u00a0 It should also be added that all of these companies have long histories of raising their dividends, whereas bond payments are fixed.<\/p>\n

    Whether you buy high-dividend stocks or follow Mr. Gross\u2019s lead and buy long-dated bonds, make sure that you\u2019re getting paid.\u00a0 As the market action of 2011 has proven, capital gains can be elusive, but dividends allow you to realize real returns every quarter. \u00a0\u00a0And in an environment of low inflation\u2014or even mild deflation\u2014those dividend checks will go a long way.<\/p>\n

    If you liked this article by Sizemore Insights<\/em>, you\u2019d probably enjoy The Sizemore Investment Letter<\/em>, our premium members-only newsletter. Click here<\/a> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

    By The Sizemore Letter Outside of Fed Chairman Ben Bernanke, Pimco founder and Co-CIO Bill Gross is the most influential man in the global bond market.\u00a0 When he speaks, investors listen. It\u2019s not for nothing that he is called the Bond King.\u00a0 His firm manages over $1 trillion in assets, and his flagship fund\u2014the Pimco … <\/p>\n

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