INSIGHTS

On October 17, 2011

Three Strategists Speak Out & Rare Apology From PIMCO!

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This weekend I ran across three articles that provide significantly different views on fixed income strategy that are right for today. The first article, Pimco’s Gross Tells Clients 2011 a ‘Stinker’ as Main Fund Trails, is rather interesting in that it contains an apology from PIMCO’s Bill Gross, the biggest bond manager in the world, who earlier this year made public predictions that, in the short term, were less than productive. As such, their performance has trailed their benchmark. I think this is significant in a number of ways. First, it shows how sensitive they are to short-term performance versus the benchmark. It is fine to think short term, but often a time-tested discipline should be adhered to for longer-term results. It is a very common mistake for a manager to make short-term changes in their discipline when they fall out of the market’s favor. This generally doesn’t end well. Mr. Gross has placed a big long-duration bet in mortgages and a new investment in Treasuries (19%).

The next article is by Jeff Gundlach (Preparing for the Coming Crisis). Jeff was an all-star bond manager that was blown out of TCW last year amid a lot of public consternation and name calling. He began his own fund, DoubleLine Capital, and now sports over $17 billion in assets under management (AUM). He is a time-tested bond manager. His views differ from many in that he is preaching to stay on the Treasury and agency side of the trade. Quite frankly he is warning of more economic shocks to come and is avoiding risk in the portfolio. Gundlach has long been a manager with a view that the future will be filled with multiple crises. This view differs somewhat from our position. However, we believe it is good to become familiar with a number of views as the future has a way of teaching all of us new lessons.

The final article is titled, Why the Economy Looks Like Recovery But Feels Like Recession. I like this explanation of the psychology of today’s investors and companies that could be reasons why the current slowdown is simply a slowdown and not a recession. The bottom line is that this recovery is just that: a recovery – and should be treated as such. Accurate forecasting of recessions is difficult at best, and in the end is really overrated. The difference in a +1% versus -1% is not significant. I believe that current estimates of gross domestic product (GDP) growth in theUnited States for Q3 and Q4 is still above 2%.

At the end of the day, we choose to stick to our time-tested game plan. Quality in “bond land” is expensive and promises little return for a fair amount of risk. The Fed is punishing Treasury investors with historically-low yields, in our opinion. We believe the only way to generate a return in these markets is by price appreciation because these notes have very little in the way of coupon income. The lack of any significant coupon means that they will trade more like zero coupon bonds when, and if, the Fed ever removes the buying pressure on that market. Agency holders will receive a similar experience. History has shown us that the market will move before the Fed does. We don’t like this space even though it has been the “space to be.” Our discipline has thus far beaten our benchmark, but we have used assets with larger coupons rather than taking huge duration risk. This sure smells like a secular top in a market to us.

Whether or not we agree with these articles, we feel it is important to be aware of current thoughts and strategies being employed. Below is additional source information.

Bhaktavatsalam, Sree Vidya (Oct 14, 2011). Pimco’s Gross Tells Clients 2011 a ‘Stinkder as Main Fund Trails. Retrieved from Bloomberg: http://www.bloomberg.com/news/2011-10-14/gross-tells-clients-2011-was-a-stinker-as-he-misjudged-economic-slowdown.html

Southwick, Katie (Oct 4, 2011). Jeffrey Gundlach: Preparing for the Coming Crisis. Retrieved from Advisor Perspectives: http://www.advisorperspectives.com/newsletters11/Jeffrey_Gundlach-Preparing_for_the_Coming_Crisis.php

Gross, Daniel (Oct 14, 2011). Why The Economy Looks Like Expansion, Feels Like Recession. Retrieved from Yahoo! Finance: http://finance.yahoo.com/blogs/daniel-gross/why-economy-looks-expansion-feels-recession-152916110.html

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