What Are You Actually Paying For?
Pacific Investment Management Company, or PIMCO, as its know in the business is huge, and when I say huge I mean really really big. As a company PIMCO manages over $1 Trillion dollars of assets around the world and is led by two of the most well known managers in the world, Mohamed A. El-Erian and William H. Gross, more commonly known as Bill.
Bill is responsible for managing the largest Bond Fund in the world, the $240 billion or so in the 'Total Return Fund' which includes all kinds of investors from individuals, corporates, retirees and charities. Managing this kind of money is a huge responsibility and with that you would assume there would be a level of both conservatism and perhaps even some acknowledgement of years of academic study that tells us predicting investment returns is almost impossible.......or maybe not.
Back in January of this year Gross made a decision that 'U.S. Treasury Bonds were the most overvalued in the Universe' and then followed through by selling them out of the portfolio. This was a huge risk as these Bonds make up around 25% of the market, so by moving out of them he was taking a huge 'bet' with other people's money. What happened next was quite surprising, and unexpected to a degree, in that the outlook for the economy in the U.S. became more pessimistic and S&P downgraded the U.S. Credit Rating. These two factors led investors to flee equity markets and run straight into treasuries helping them generate a significant return for those who held them.
At the end of last month the Total Return Fund ranked 501st out of 589 bond funds in its category.
Of his decision Bill said, "When you’re underperforming the index, you go home at night and cry in your beer,” according to the FT, he also added: “It’s not fun, but who said this business should be fun. We’re too well paid to hang our heads and say boo hoo.” Whilst his competitors weren't exactly defending there was one quote that said (in his defense) "but economic conditions have deteriorated far faster than PIMCO, or even we ever anticipated."
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