Bill Gross Eats Humble Pie

by Tom Taulli | August 30, 2011 10:01 am

Bill Gross Eats Humble Pie

gross 300x187 Bill Gross Eats Humble PieFinancial history is full of market gurus that have made horrible calls. Just look at Joe Granville. In April 1982, he said the final crash would occur. Of course, it was the start of one of history’s biggest bull markets.

As should be no surprise, there has been no shortage of bad calls since then. In fact, 2011 has seen some notable examples.

Perhaps the most prominent came from PIMCO’s co-chief investment officer, Bill Gross. Earlier this year, he made it widely known that U.S. Treasuries were headed for a rout. Basically, he believed that by June — when the Federal Reserve would end its $600 billion QE2 bond-buying program — there would be little demand.

It seemed to make sense. But Gross did not foresee the sovereign debt crises in both the U.S. and Europe — as well as the rapid deterioration in the economies. The result was a global flight to “safe havens.” In other words, there was a huge rally in U.S. Treasuries — even though S&P downgraded the American debt!

Because of this, Gross’ PIMCO Total Return Fund (MUTF:PTTAX[1]) has been a laggard. So far this year, the return is 3.01%, which is below the category average of 4.39% (according to Morningstar.com). His fund is ranked 501 out of 508.

But interestingly enough, Gross has recognized that he indeed made a bad call (based on an interview with the Financial Times[2]). All in all, he mis-forecast the growth rate in the U.S. Now his view is that a recession is likely.

True, Gross gets paid big bucks for making the right calls. And this one certainly was a huge miss. Yet it is important to recognize that Gross has proven to be one of the best bond managers. His average annual return for the past 15 years is an impressive 7.07%.

Besides, this year has been tough for some of the world’s best investors. A prime example is John Paulson, whose flagship fund fell by 39% (as of mid-August). He got crushed with big bets on companies like Citigroup (NYSE:C[3]) and Bank of America (NYSE:BAC[4]).

So even though Gross was wrong, the good news is that he still is making money for his investors. And if history is any indicator, it’s a good bet he’ll find a way to get things back on track.

Tom Taulli is the author of various books, including “All About Commodities.”[5] He does not own a position in any of the stocks named here.

Endnotes:
  1. PTTAX: http://studio-5.financialcontent.com/investplace/quote?Symbol=PTTAX
  2. interview with the Financial Times: http://www.theglobeandmail.com/globe-investor/bill-gross-admits-mistake-in-dumping-us-debt/article2146053/
  3. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  4. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  5. “All About Commodities.”: http://goo.gl/6Q4x5

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