Wednesday, October 26, 2011

Big-name gurus not too big to fail

By Howard Gold

NEW YORK (MarketWatch) — The market has been pretty rough these days for all of us. But some big-name investors are probably doing worse than you are.

William H. Gross, the head of Pimco Total Return Fund /quotes/zigman/132344 PTTRX +0.09%  and the most illustrious bond investor of our time, is reeling from a big move out of U.S. Treasurys early in the year.

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John A. Paulson, Mr. “Greatest Trade Ever,” is anxiously awaiting the end of the month, when he’ll see how many of his investors cash out of his Advantage hedge funds after heavy losses this year.

Both Gross and Paulson are big names who’ve had rough patches and their experience shows how tough it is for even the best to beat the market consistently over long periods, especially if managers make big macro bets on the economy or stray beyond their areas of expertise. (Paulson’s spokesman declined my request for comment, and Pimco didn’t respond by deadline.)

Bill Gross has presided over Pimco Total Return for nearly 25 years. During that time, he built it into the U.S.’s biggest bond fund, with $242.2 billion in assets as of Sept. 30. Forbes estimates his net worth at $2.2 billion.

Gross has fame as well as fortune, appearing regularly on CNBC, where he is lionized, as well as in the venerable Barron’s Roundtable. He’s also well known for his clever commentaries, which are posted monthly on Pimco’s website.

In his March missive, Gross explained his big call for this year: He was dumping Treasurys because of what could happen once the Federal Reserve ended its latest round of quantitative easing (QE2).

“Who will buy Treasurys when the Fed doesn’t?” he wrote. “Yields may have to go higher, maybe even much higher, to attract buying interest.”

It seemed plausible at the time. But when the economy weakened and the European debt crisis flared up again, investors did what they did in 2008 — rushed for the safety of U.S. Treasurys. Amazingly, that occurred even after Standard & Poor’s cut the U.S.’s AAA rating in August.

Read Howard Gold’s column in which Gary Shilling predicts a new recession and favors Treasurys in

The flight-to-safety rally drove the yield on the 10-year Treasury note down to a 65-year low of 1.72% on Oct. 4, from around 3.5% in early March, a humongous move which Pimco shareholders missed. Pimco Total Return, which has beaten its benchmark over every time period since its inception, has been near the bottom of its peer group over the past year.

Gross admitted to losing sleep over it, and finally, predictably, he threw in the towel. In a piece entitled “Mea Culpa,” Gross wrote: “This year is a stinker. Pimco’s center fielder has lost a few fly balls in the sun.”

“As Europe’s crisis and the U.S. debt ceiling debacle turned developed economies towards a potential recession, the Total Return Fund had too little risk off and too much risk on,” he continued.

But now, having been too optimistic about the economy, Gross seems to be going to the other extreme. Pimco started loading up on long-duration Treasurys late this summer, anticipating that the Fed’s Operation Twist would gobble up 30-year T-bonds.

We’ll see if he’s right, but I wonder whether this kind of all-or-nothing bet is really beneficial to investors. Actually I don’t wonder, but I’ll get to that later.


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