Sideways: Bill Gross and Jeff Gundlach – The Bill and Jeff show
The jump in treasury yields in late June prompted the two highest-profile US bond gurus to make public pronouncements designed to calm the nerves of their acolytes.
Bill Gross, the head of the world’s biggest bond fund, Pimco, showed that mere market disruption was not enough to affect his steely commitment to addressing his public chiefly by way of contorted metaphor. His investment outlook for July took a long time to get to its conclusion – that investors should stick with Pimco – and Gross might have worried some of his readers with a lengthy opening analogy about how Federal Reserve chairman Ben Bernanke had pushed investors to one side of an overloaded and overlevered ship that represents the economy.
"Everyone was looking for lifeboats on the starboard side of the ship, and selling begat even more selling, even in treasuries," Gross explained, in a passage that one hopes did not prompt too many puzzled investors to start investigating whether their portfolios were biased towards the port or starboard side.
"Where does the ship go from here? Should you as a bond investor jump overboard and risk the cold money market Atlantic Ocean at near zero degrees?" asked Gross. Readers who could almost feel the icy waters of bond market reality rising around their feet could finally take some comfort as Gross assured them that they should not, in fact, risk hypothermia by moving their money.
"Have a cocktail, tell the band to stop playing dirges, because you’re gonna be just fine with Pimco at the helm," Gross concluded. Gross did not find room to remind his readers that his $285 billion Total Return bond fund lost 3.65% in June alone and is underperforming most other bond funds this year, but a good metaphor can only be stretched so far in order to include additional facts. Otherwise it might collapse like a hot-air balloon of pretension that is pierced by a fiery arrow of unwelcome performance information.
As Captain Gross lashed himself to the wheel of the good ship Pimco, his counterpart Jeff Gundlach at DoubleLine took the opportunity to remind investors that he is normally right.
Gundlach prefaced this remark with a rare admission of error, when he acknowledged that his prediction in early June that 10-year treasury yields would hold below 2.35% had been undermined by their move above 2.6% in late June.
But he was able to place this minor setback in context. "I am wrong 30% of the time and right 70% of the time, and this was one that was wrong," he was quoted as saying.
Some investors will have been reassured by Gundlach’s unswerving self-confidence and his ability to measure a personal hit/miss rate and provide a practical ratio of his rightness to wrongness. Others might have been alarmed, or at least wondered how they are supposed to know when his pronouncements fall into the 30% ‘wrong’ category.
Gross and Gundlach are unusual among debt market managers (as opposed to analysts who do not actually manage money) in that they are at least willing to put their reputations on the line with public pronouncements about their expectations for market direction. There has always been a sneaking suspicion among dealers and rival investors that Gross uses his public statements to tilt markets in favour of positions that Pimco has already amassed and is considering unwinding. But he wouldn’t be much of a bond guru if that wasn’t the case, and most market participants concede as much. And investors in Pimco are looking for Gross to outperform his benchmarks, even if he helps his trades along with well-timed comments.
There is even grudging admiration of Gundlach, whose boorish public persona is accompanied by a strong track record at TCW and later his own firm of DoubleLine.
Both Gross and Gundlach currently face serious challenges to the reputations built by their historical performance, however. Their funds have limited practical ability to hedge exposure, given their size and bias to long holdings. This will make tactical as well as strategic allocation decisions vital as yields make their eventual move upwards.