Should Your Bond Allocations Follow Bill Gross to Janus?

A week ago Friday, the investment world was shocked when Bill Gross, the venerable bond manager, known as the King of Bonds, announced he was leaving the firm he founded and heading to Janus. Not only is it unusual for the founder of a firm to leave abruptly as he did, but to go to a shop that is not known for its fixed income funds? The whole situation was odd, to say the least.

For the last week, investors have been evaluating their options and trying to figure out whether to stay with PIMCO, or take their money elsewhere. These are big money investors so naturally, the risk of heavy outflows from the fund are a major concern for all other investors in the fund. And liquidity issues that may arise from possibly being the biggest seller of certain financial assets could affect the net asset value of the fund in the short term. In the meantime, PIMCO has gone on an all-out offensive to quell fears of a talent vacuum and have assured investors that the firm is plenty deep in talent to continue to manage the flagship PIMCO Total Return Bond Fund and any other funds that may have been managed fully or partially by Bill Gross.

I agree.

Bill Gross Success and Reputation

Bill Gross has been synonymous with bond investing since as long as I can remember. His performance over the years is irrefutable and he was entrusted by investors to the tune of over $200 billion in assets under management, which enabled him to earn a cool $200 million per year from PIMCO. While he was the star of the show at PIMCO, he certainly didn’t go it alone. Like a quarterback with no offensive line to protect him, or a shooting guard with no one to pass him the ball, PIMCO’s success, including that of the Total Return Bond fund had plenty to do with the team that Bill built around him as much as it had to do with his bond picking abilities.

The Latter Years

But the Total Return Bond fund had been underperforming many other notable bond funds in recent years. A heavy allocation to Treasuries hurt performance pretty bad earlier this year when rates declined instead of rising. Until Gross’ resignation, the fund had 16 consecutive quarters of outflows yet was still the largest bond fund in the market. Perhaps the funds size had something to do with underperformance or the environment was so unique (with QE) that the old rules of bond investing just no longer applied. Over the last 5 years, PIMCO Total Return Bond fund had an annualized return of just 4.7%, a 3 year annualized return of 4.3%, and a 1 year return of 3.1%, which ranked in the 54 th. 26 th. and 85 th percentile, respectively. Nothing to brag about.

Source: Morningstar

Some of the other bond funds mentioned this week as possible alternatives have had better performance than PIMCO in all periods mentioned. Metropolitan West Total Return ranked in the 5 th. 8 th. and 39 th percentile for the 5 year, 3 year, and 1 year returns in the category. So maybe its best that Bill has moved on. There are some talented portfolio managers at PIMCO that from the outside, look like they may have been limited by Bill’s dominating personality.

Egos and Turmoil

It was no secret that Bill was an egotistical maniac that publicly ridiculed other employees. Plenty of stories have been publicized about his strict management style and my-way-or-the-highway mentality. Earlier this year, the turmoil going on within PIMCO came to light when well known, and dare I say, well-liked Mohamed El-Arian, resigned from the firm due to personal differences with Gross. Then, last week, after his announcement that he was leaving PIMCO, it was publicized that within PIMCO, it had already been decided to let him go.

What are the risks?

Risks remain that other high level personnel will join Gross at Janus once their non-compete agreements expire. (why Gross didn’t have one is surprising). But with all of the stories about his solitary style of managing portfolios and confrontational nature with those that disagree with him, I wonder how many others will actually leave to join him. In fact, these very same people may now finally have the freedom to implement their own ideas. Ideas that may have been shot down by Gross in the past. Others say that PIMCO may not have it together enough to continue to successfully run the funds Gross previously managed. I find that argument to be outright silly. A $200 billion organization doesn’t have the ability to continue to operate because one person left? Not likely, even if it was the founder and at one point the most important person at the firm.

Should you stay or should you go?

So the question still remains whether to remain invested at PIMCO, move your assets to another fund, or follow Gross to Janus. Choosing among the first two options can be difficult. There are other good funds out there, as I showed above, and it could take some time for the new portfolio managers to influence the performance of the fund. After all, it is a $200 billion behemoth and it won’t be easy to ‘shift’ funds into other securities. But on whether to follow Gross to Janus I offer a simple solution. Let’s call it the age test or the life expectancy test. It works like this: Bill Gross is 70 years old. If you are younger than Bill Gross or have a significantly longer life expectancy than him, you should NOT follow him to Janus. What for? So you have to find another bond fund manager once the old guy kicks the bucket? After all, he is 70 years old!

You may be thinking, ‘what a simplistic and moronic rule to use for an investment decision’. Perhaps, but I consider it just as moronic to assume that Bill Gross was a one-man show. He wasn’t. And he left the rest of the show back at PIMCO, with plenty of young talent eager to show they too have some scruples to apply to the bond market. In all seriousness, I see no reason to move your investments from PIMCO to Janus. Either stay put, or shift some of the allocation from the PIMCO Total Return Bond fund into some of the very good funds mentioned above.