PIMCO's Total Return Fund (PTTRX) is the largest mutual fund in the U.S, with assets in excess of $250 billion. The goal of the fund is "maximum total return, consistent with preservation of capital and prudent investment management." It invests at least 65% of its assets in investment grade fixed income instruments.
The fund is managed by Bill Gross, who is something of an icon in the world of bond fund managers. His financial acumen has served him well. He has a reported net worth of $1.3 billion and is known for discovering the key to making money in bonds: trade don't buy and hold.
When Gross was inducted into the Fixed Income Analysts Society Hall of Fame in 1996, his virtues were extolled in an induction speech given by Jack Malvey, who was then president of the society. Malvey noted that Gross's "...methodology arguably has spawned the entire active total-return approach to fixed-income investing." Malvey noted PIMCO's remarkable record of beating the Lehman Aggregate Bond Index in 79 out of 80 periods from the first quarter of 1974 through the third quarter of 1996.
Very impressive. You would think if anyone could run an actively managed total return fund, it would be Mr. Gross. I assume that was precisely the thinking that made the fund so successful in attracting assets.
So, what happened?
According to a recent article in Barron's, investors yanked $1.9 billion from the fund in November. Bloomberg reported the fund lost 3% in the 30 days through December 8, and posted the worst record of all but one of the ten largest bond funds. This dismal performance is in stark contrast to its five year record, which placed it in the top 2% of its peers.
Will the future of this fund be like its five year record, or is its dismal recent performance a precursor of what's to follow?
No one knows and that's precisely the problem with active management.
Even a long streak of stellar performance is not indicative of future returns. Standard & Poor's does a semi-annual analysis of the performance of active vs. passive stock and bond funds. Its Mid-Year 2010 Scorecard found that, for the five years ending June 30, 2010, the data was "unequivocal" for fixed income funds. Across all categories, more than 75% of active bond fund managers failed to beat their benchmarks. 12% of fixed income funds merged or were liquidated.
Is Bill Gross the bond guru you have been looking for? Is he an exception to this data?
Like most gurus, sometimes he is right and sometimes he is wrong. You can see examples of his predictions here.
It's difficult for investors to accept the fact that the predictive powers of even the most impressive experts are typically no greater than you would expect from the flip of a coin. That's not surprising because they are predicting unpredictable, random events.
It's really lucrative to be anointed a stock or bond guru. Assets will flood into your mutual fund and the management fees (and resulting IPO) can make you very wealthy.
For investors, following the pied piper du jour is a slippery slope. Underperforming the market is the most likely outcome.
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Here is the trailer for my new book, Timeless Investment Advice.