The facts speak for themselves; early this year he made a big song and dance
about his decision to make an almost complete exit from the Treasury bond
market. He was worried about inflation.
Naturally that was a disaster and his flagship fund at Pimco, of which he is
co-chief investment officer, has made only 1.9 per cent for its investors
this year, leaving it in the bottom decile of all US bond funds.
Now, rather than stick to his guns, admitting only to an error in timing, he
is going into reverse, vacuuming up Treasury and mortgage agency debt
wherever he can find it, and drastically shifting his portfolio towards
longer-dated securities – precisely those bonds whose value would be most
damaged by inflation.
HIdeously misjudged
With hindsight, his big bet against bonds was hideously misjudged. That is
undeniable. His new bet, which boils down to “don’t fight the Fed”, might
not be much better.
The Federal Reserve’s Operation Twist entails buying long-dated Treasuries and
agency bonds, but traders have priced much of that in.
Real 10-year yields are now minus 1.55 per cent, by far their lowest since the
inflationary 1970s, save the weeks around the Lehman collapse, so upside
looks limited. Without more haven flows into long US bonds, this bet may
easily also come unstuck.
Quality
But Mr Gross does not deserve abuse. Long-term investment managers can afford
occasional mistakes. The question is their response. An investor’s key
quality is emotional intelligence; the ability to make contrarian bets
against the herd, and to admit a mistake, rather than hold on to a losing
bet in the vain hope of eventually making back losses.
Mr Gross has that quality. His investors, despite the lousy year he has given
them, should be glad of it.
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