February 4, 2019

Breakingviews: Bill Gross sends last missive on bonds – and fees

by Breakingviews.

Bill Gross is yielding to the times. The co-founder of Pimco, who once ran a fund with $293 billion of assets, is retiring from Janus Henderson, the asset manager he joined in 2014. The 74-year-old is entitled to step back, but it’s hard not to see the move as a final missive on government bonds – and asset-management fees.

At Pimco, owned by Allianz, Gross helped build a bond-investing powerhouse. He was known as the “Bond King” and accumulated assets, impressive returns and personal wealth. As his investment performance and relationships at Pimco deteriorated in the run-up to his acrimonious departure, he devoted one of his rambling investor letters to his deceased cat, a female named Bob.

For most of his career, Gross was in the right place at the right time. From the mid-1980s until just a few years ago, yields steadily fell, barely shaken off course even by the financial crisis. That meant bond prices were rising – a tailwind for any fund manager.

But times have changed. Assets in his Janus Henderson unconstrained bond fund sank below $1 billion at the end of 2018, with performance falling short of the 0.91 percent annual return on its three-month Libor benchmark in the nearly five years since inception. Even Class I fund units, with relatively low fees, only returned an annualized 0.38 percent.

Yet Janus Henderson’s annual fee was 0.78 percent for those Class I units, meaning on simplified math that the firm pocketed twice as much as investors received.

That helps explain why, as in equities, investors are switching to low-cost, passive index-tracking holdings. Among U.S. bond mutual funds and exchange-traded funds, the proportion of assets tracking indexes and the like was 26 percent at the end of 2017, up from less than 5 percent in 1995, according to a working paper from the Federal Reserve Bank of Boston.

Gross has done well enough to have made, by Janus Henderson’s account, $800 million in philanthropic donations over 20 years and still have a net worth of $1.5 billion, by Forbes’ tally. And he has a $390 million family foundation to run in retirement. That’s a remarkable achievement. Investors may never again be so generous to an active bond-fund manager.

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