News surrounding 70-year-old Bill Gross's switch from Pimco to Janus has generated a good deal of speculation as to the potential impact on bond markets. When put in perspective, however, it is doubtful there will be much impact for anyone not directly involved with the specific funds he managed.
(More: Meet the new bond kings)
One perspective is the relative magnitude of the fund Mr. Gross managed for Pimco, its Total Return Fund. PTTPX, the firm's largest fund, had about $200 billion in fixed income securities, or about one-half of one percent of the total outstanding U.S. bond market debt, which now stands at about $38.1 trillion (see table). Nearly half of this is U.S. government debt. Pimco's overall assets are a significant percentage of the total ($1.9 trillion or about 5%), but he directly managed only PTTPX.
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The fund he will now manage for Janus, its Global Unconstrained Bond Fund (JUCIX), has a miniscule $80 million. Nearly $70 million flowed in almost immediately when word got out that he would take charge of the fund. But Mr. Gross's personal worth is about $2.3 billion, so he could have simply switched his own holdings to make up large chunk of this inflow. All of Janus's fixed income funds combined amount to only about $30 billion. Frankly, Janus small potatoes in fixed income compared to Pimco's $1.9 trillion. So Bill Gross switching from one company to another may generate headlines in a press that is ever-hungry for something to print, but it is unlikely to create much of a ripple in the bond markets overall.
Far more potent is the likely impact of the rising impact of interest rates. Again, to provide perspective, consider where we are compared to the long run. Figure 1 tracks yields on 10-year U.S. Treasury bonds since 1800. It is clear that the past 65 years have been an aberration. Rapidly rising rates from 1950 to 1980 led to terrible total returns for bond investors. But rapidly falling rates since 1981 led to wonderful total returns for bond investors – and just happens to coincide with Mr. Gross's rise to fame and fortune. Talk about being in the right place at the right time!
As Mr. Gross himself has said, we all need to get used to the “new normal” of lower total returns to fixed income and perhaps even to a “new neutral” of slow global growth. Bill's move to Janus is mindful of an aging professional quarterback switching teams after his talents – or luck – begin to fade. Within a year or two, they quietly retire and drop from view. The sportscasters like to talk a lot about it, but it seldom has much impact on the overall NFL.
Figure 1
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Stephen J. Huxley is chief investment strategist at Asset Dedication
