The fall of the “bond king”

“Witty market commentary is more fun without having other people’s money at stake. (At least for Lex). Bill Gross may soon agree. On Monday, Janus Henderson announced that the septuagenarian sage will retire. The Bond King joined Janus Capital Group in 2014 after an ugly split at Pimco.

“At Janus he maintained his trademark eccentric punditry. In one dispatch last year, ostensibly about the direction of the US 10-year Treasury yield, Mr Gross name-dropped Moses, Stalin, Hitler, Pol Pot, and mentioned The Lord of the Flies. However, what counts is performance, and his has faltered of late.

“Assets under management at his global “unconstrained” bond fund had dipped beneath an embarrassing $1bn.

“Mr Gross’s exit is not just a denouement for a fallen legend but also for a 30-year bond bull market and active asset management more generally.

“The overall expense ratio for Mr Gross’s fund is 78 basis points. What did that buy you? Since its 2014 inception (just before Mr Gross’s arrival) through to the end of 2018, the fund returned an annualised 38bp. Compare that to 91bp for receiving a three-month US Libor rate. Worse, according to the Janus Henderson website, he badly trailed a benchmark for free-ranging bond funds such as his.

“On the day Mr Gross joined Janus in 2014, its shares jumped by more than 40 per cent. The hope was that his record and relationships would attract a flood of new capital to the relative minnow which then had less than $200bn in total AUM. Since then Janus has merged with the UK’s Henderson Group. The market value of the merged group has nearly halved in the past year. The business model for active money managers has struggled.

“Mr Gross packaged dull bond investing into a product that showcased his facility with macroeconomics, geopolitics and even pop culture. Perhaps robots will do the asset allocation part now. Mr Gross, however, need not stop writing. “

– The Financial Times’ Lex column on the retirement of Bill Gross, ‘Lost the plot’, 5^th February 2019.

As a summary of how traditional media regard the asset management business, this Lex column is hard to beat. It is a fine tradition of Fleet Street, for example, that the great and the good must be built up, in order that they can be subsequently knocked down. Having read and inwardly digested this extraordinary piece of snark, I did a quick search of the FT’s online archive, which revealed over 4,000 stories relating to Bill Gross over the years. The bigger they are, the harder they fall.

It is difficult not to conclude that the article in question is motivated, at least in part, by some form of private or professional envy. Whatever his achievements and his more recent investment performance, Bill Gross did what he did in his own name, in the full glare of public (and the FT’s) attention. He did not starve away in a garret, anonymously – like either the Lex columnist or the entire retinue of The Economist, who continue to publish their curiously anti-free market narratives without any form of personal accountability. Whereas Bill Gross retires a billionaire.

And this is really the point. Bill Gross, more than anybody else alive, personally embodies the great bond bull run of the late 20^th century. This bull run started under the aegis of Paul Volcker at the US Federal Reserve, during whose tenure the prime interest rate in the US touched the now extraordinary-seeming level of 21.5%. With Volcker – unlike all subsequent Fed chairmen – having successfully and definitively squashed inflation using painfully high interest rates, the bond market needed little impetus to embark on a monumental rally. It was a rally that nobody rode more successfully than Bill Gross himself. Until recently, at any rate.

Whatever you felt with regard to Bill Gross’ whimsical monthly commentaries (and I, too, found them painfully self-indulgent at times), you always sensed that he was being honest about the market and his interactions with it. He was basically a bond bull who outstayed his welcome. It is probably true that as in politics, almost all fund management careers end in failure. When staying in the limelight is consistent with earning large sums of money from a respectful clientele, who would willingly relinquish that attention?

This takes us to the second “judgment of Lex”: that only huge asset managers are worth paying any attention to. Managing less than $1 billion in his last incarnation would therefore have been “embarrassing” to Mr Gross. Well, speak for yourself. Writing as someone who would be extravagantly happy to be managing even $1 billion by way of assets, this statement deserves further examination. The reality, at least from the perspective of this asset manager, is that a paying public will be best served by fund managers who deliberately keep their asset base low. Stray beyond anyone’s reasonable ability to deliver value – by managing nearly $300 billion within the Pimco Total Return Fund, as Gross once did – and the likelihood of beating the market, or even the majority of your professional peer group, starts to look vanishingly small. It’s worth remembering that whereas the stock market is wildly inefficient (at least on a comparative basis), the bond market is ruthlessly efficient– as you might expect from a market dominated by large, institutional players. So, the capacity to add any real value by exploiting price inefficiencies is simply not that great – as Gross ultimately found out to his cost.

The uncomfortable reality for gigantic asset gathering firms is that most investors will be better served by boutiques. Smaller fund managers have the luxury of competing on the basis of net returns and not on the basis of marketing heft. The best fund managers I co-invest with have already closed to new investors by the time they reach or exceed $200 million or so under management. Neither Pimco nor Janus Henderson could profitably operate with that level of assets – but a good boutique manager can, especially operating within a niche market, like, say, small-cap Japan value. The FT cannot plausibly operate without an implicit conflict of interests here, given its dependency on advertising revenue from fund management giants. Most boutiques simply don’t advertise at all – in large part for commercial reasons, but also in part for philosophical ones, they market their wares by word of mouth alone.


The single most intriguing aspect of Bill Gross’ retirement goes barely mentioned by Lex. What does the departure of “the bond king” say about prospects for the global bond market as a whole? While I am loath to succumb to a subjective narrative that might yet be wildly off the mark, it strikes me that it says a great deal about the future returns that are likely achievable by bond investors. They are going to be lousy.

This is not a forecast predicated upon some windy, unsubstantiated prognostication about an uncertain future. It is a reflection of simple mathematics. While there has never been more debt in existence, the yield on that debt has rarely been lower. Interest rates globally are starting – gently, admittedly – to rise from 5,000-year lows. To put it another way, it is unrealistic to be buying an asset (which, more strictly, is actually a liability) at a 5,000-year price high and expect the future to be highly profitable. In short, I think the risk that bond investors in the years to come get savaged by a bear market is uncomfortably, outrageously high. For this reason, I don’t own bonds in any form and I recommend that you don’t, either. The dilemma facing central banks has been neatly underscored by the Fed’s sudden volte-face on interest rates. Having previously suggested to the market that it should expect at least two rate hikes this year, Jerome Powell at the US Federal Reserve appears to have gone into hibernation. As the economist Daniel Lacalle points out,

An economy that cannot take 3% rates with 3.7% unemployment and a 3.4% annualized growth rate is either not a “strong economy” or the central bank policy only looks to inflate financial assets.

This is not a perspective that Lex chooses to discuss, at least not in its obituary for Bill Gross’ professional career.

Which brings us back to the dubious merits of journalism. I particularly liked the following tweet from the US lawyer and ASI member Preston Byrne, in response to the self-interested press reaction to hundreds of layoffs at the digital publisher Buzzfeed:

*Coal industry dies

* Journalists: “Learn to code, miners.”

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*Overfunded tech company dies

*Journalists: “LOL Theranos 2. Suck it, techbro man-babies.”

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*Overfunded media company lays off 10 people

*Journalists: “Capitalism is evil and this is the end of our democracy.”

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Present company clearly excluded, but when it comes to journalism, there has to be the risk that many journalists are simply loathsome creatures, and, not to put too fine a point on it, we would all be better off without them.