Bill Gross recently created a massive stir in the bond market and in the financial media when he jumped from PIMCO to Janus Capital Group Inc. (NYSE: JNS). The move has taken place and Gross has started managing money with new inflows. Now we have the first monthly investment outlook from Gross at Janus, and he outlines some of his view on how he plans to manage the Janus Global Unconstrained Bond Fund (JUCDX).
As usual, Gross has kept his colorful views alive. His first outlook from Janus was titled “You Only Dance Twice.” Gross first addressed that he is aware that this change of employment has raised a lot of questions. He also confirmed that there are some issues he cannot discuss, but shared information on others.
A key takeaway is that Gross has tough love and is calling for 3% to 4% returns from bonds and 5% to 6% returns from stocks.
Why did I leave PIMCO?
Had there been a reasonable way to continue there, I would have stayed to my last breath. I was honored by the trust of the millions of clients and thousands of employees over decades. They have been the center of my life’s work. I am very proud of my record there for more than 40 years. PIMCO is a great firm with lots of great people, and Allianz was a fine owner for many years. But slowly and with great hesitation, I came to understand that it was time for me to leave. It happens sometimes to founders! But that is water under the bridge, as they say. I don’t plan to address it further. Now let’s talk about the future.
My first professional loves were markets, investing and competing in that framework. I want to return to a simpler role, completely focused on markets, investment performance and serving my clients. It seems like a good time to turn away from the complexity of helping to run a huge firm. I have had a 20-year relationship with Janus CEO Dick Weil (10 of which include his working for me as PIMCO’s Chief Operating Officer). When I asked him whether Janus might provide me with that simple opportunity, he responded with a very enthusiastic “yes” let’s dance together. I am excited to work in a true partnership environment with people I trust. I want to help this team succeed. Most importantly, I want to continue to help clients achieve their goals. I am not ready to retire, so here I am… and I see great opportunities for the Janus Global Unconstrained Bond strategy. As a brand new strategy it is tiny, certainly compared to anything I have been used to in recent decades. But that opens the door to a lot of new strategies and opportunities to generate outperformance for my new (and hopefully many continuing) clients.
We have taken some of the key views on the markets ahead from his You Only Dance Twice.
While U.S. bond and equity markets have been thrust into a seemingly safe outer orbit, the same cannot be said for other developed and developing nations — many have entered or are bordering on recessions with limited monetary firepower remaining…
I have the following tough love advice — somewhat resembling the counsel given to me in recent weeks: there is a new financial era. Accept it and modify your behavior accordingly, so that your future is safe, secure, and you look forward to a brighter tomorrow.
Gross says: “FINANCIAL MARKETS ARE ARTIFICIALLY PRICED — there is nothing normal about a three year German Bund yielding a ‘minus’ 10 basis points.”
Gross warns about stock values: “While profits in many cases are at record highs, the discounting of future profit streams by an artificially low interest rate results in corresponding high P/E ratios.”
On real estate: “Real estate cap rates, which help to price homes and commercial shopping centers, are affected in the same way.”
QE warning: “While monetary policy with its Quantitative Easing and forward guidance for low future interest rates have salvaged a semblance of growth and job gains — especially in the U.S. — they have brought prosperity forward in the financial markets. If yields can’t go much lower, then bond market capital gains are limited. The same logic applies in other asset categories.”
Gross gives predictions for the market ahead after a Biblical seven years of fat with another seven years: Bonds returning 3% to 4% at best and stocks returning 5% to 6% on the outside. Gross said:
That may not be enough for your retirement or your kid’s college education. It certainly isn’t for many private and public pension funds that still have a fairy tale belief in an average 7% to 8% return for the next 10 to 20 years! What do you do?