Anyone with a dime invested knows about the emotional aspect
offinancial markets .
A recent investor behavior study by research firm Dalbar shows
that the averageequity investor has seen a return of just 2.3%
annually over the past 20 years, underperforming the S&P 500
by an annual average of 4.3%.
The culprit? About half of the shortfall in returns -- 45% to
55% -- is due to psychologicalfactors like fear of loss and
following the herd, according to the study. Individual investors
are notorious for emotionalinvesting likeirrational exuberance
orpanic selling . In fact, in 2012, investors trying to time
themarket guessed right just 42% of the time -- worse odds than a
But investing inbonds is different, right? Many investors
followstocks passionately while thefixed-income portion of their
portfolio sits there collecting dust. The same Dalbar study shows
that the average fixed-income investor has underperformed the
aggregatebond index by an annualized 5.6% over the past 20
That's where Bill Gross, the "bond king," comes in.
Bill Gross' Bio
Bill Gross graduated from Duke University with a degree in
psychology in 1966. After serving in the Navy, he received an MBA
at the UCLA Anderson School of Management. In an interesting
twist, Gross played blackjack professionally in Las Vegas before
joining Pacific Mutual Life as aninvestment analyst and earning
his charteredfinancial analyst designation.
Back then, the bond market was a place forbuy-and-hold and
used exclusively as a lower-risk alternative to stocks. Investors
didn't expect their bond portfolios to return much, but the
returns were safe from the ups and downs ofWall Street .
||Bill Gross has used his keen strategic ability to beat
the market for almost three decades.
In 1971, Gross, along with Bill Podlich and Jim Muzzy,
persuaded Pacific Mutual to let them actively manage thebond fund
in a separate account and formed the PacificInvestment Management
Co. PIMCO has grown to over $2 trillion in assets under
management and is the world's largest bond investor.
The PIMCO Total ReturnFund , which Gross has managed since
1987, has returned an annualized 8.3% over that period,
consistently beating both bond and equity indexes, and earned
Gross Morningstar'sFund Manager of the Decade for 2000-2009. The
company launched the
PIMCO Total ReturnETF (
to track themutual fund in February 2012.
Bill Gross' Investment Strategy
Unlike many who have achieved the rank of guru in the investment
community, Gross' fame isn't due to a handful of notable bets but
a long track record of success. Gross has used his keen strategic
ability to beat the market for almost three decades.
Gross' success revolves around developing a three- to
five-year secular outlook and then structuring the portfolio to
take advantage of short-term mispricings. For example, theeconomy
's inability to strongly respond to the Federal Reserve's
four-year attack on interest rates and attempts atquantitative
easing (QE) has led Gross to predict that a "new normal"will
persist in lower than expected returns and volatility over the
foreseeable future. This has prompted him to shift his portfolio
to higher-quality bonds with shortermaturities that won't react
as negatively to increases in rates orinflation .
On top of this secular outlook, Gross tactically shifts the
portfolio to sectors that he thinks have gotten too cheap or too
Bill Gross' Portfolio: What's He Holding Now?
Gross has made it known exactly what kind of danger bond
investors are in. Recently (on April 29, to be exact), he called
an end to the 30-year bondbull market but said thebear market
might not yet be among us.
Gross writes a monthly newsletter that explains how his
total return fund is adjusting its positions, along with what has
added to or detracted from its recent performance. With his
long-term view of weak markets and central bank-manipulated
yields, Gross is seeking bond returns in quality names with
PIMCO Total Return ETF's Top 10 Holdings
He has increased his exposure to emerging-marketgovernment
bonds issued in the local currencies, for two reasons. First, the
bonds pay higher yields because of the perceived risk though many
of these large countries have a stronger financial position that
their heavily indebted developed peers. Second, the bonds also
benefit the dollar-based investor asthe Fed continues to
printmoney and debase thegreenback . Central banks in
emerging-market countries do not typically run quantitative
easing programs because of the inflationary and credibility
risks. This means these currencies should do better against the
dollar for the foreseeable future.
Action to Take -->
Investors who want to follow Bill Gross should consider two
To mirror Gross' move into emerging-market bonds, consider an ETF
WisdomTreeEmerging Markets Local Debt Fund (
, which holds the localcurrency debt of 15 countries with 41% in
Asian markets, 30% in Latin America and 27% in Europe, Middle
East and African countries. Most of the debt is BBB or A-rated,
and the fund pays a 4%dividend yield .
Gross has recently increased the Treasury holdings in his
portfolio as he has become more vocal on the effect of the Fed's
rate policy andQE program. Investors could follow this move with
iShares Barclays 20-year Treasury Fund (
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