There are very few people in this world that are household names. In the world of bond investing, Bill Gross founder and Co-CIO of Pacific Investment Management Company, LLC (PIMCO) may just be one of those names. His Total Return Fund is available to thousands of individuals through their 401K plan and through just about every financial advisor on the planet. Along with CEO and Co-CIO Mohamed El-Erian they take responsibility for coining the term the "New Normal" to describe the world's economy over the next 20 years, a world in which growth prospects may be lower while long-held assumptions about portfolio allocations are being challenged.
Bill Gross may be the world's greatest bond manager, but I consider him to be a far greater businessman. He grew his company from managing $12 Million in 1971 to over $800 Billion today. It is this businessman that is trying to move his firm from the old normal to the new normal by doing the unthinkable, managing portfolio's of common stocks.
Oh yes people, Bill Gross is encouraging you to buy common stock. Not all stocks, but those unloved utilities stocks. Here is what he said in his December message, "...I figure, why not just buy utilities if that's what the future American capitalistic model is likely to resemble. Pricewise, they're only halfway between their 2007 peaks and 2008 lows - 25% from the bottom. Their growth in earnings should mimic the U.S. economy as they always have, and most importantly they yield 5-6% not .01%! In a low growth environment, it seems to me that a company's stock should yield more than its less risky debt, and many utilities provide just that opportunity. Utilities and even quasi-utility telecommunications companies now yield between 5 and 6%, whereas their 10 and 30 year bonds yield less and at a higher tax rate to you the investor. "
I would not expect Mr. Gross to jump onto the common stock band wagon whole heartedly, after all he has a reputation to uphold and his current business requires a few people to own bonds. I, for one, believe actions speak louder than words. Last week, he and his fellow PIMCO owners brought into the firm three individuals to build an equity business. These three are no light-weights. They include Anne Gudefin and Charles Lahr previously the co-portfolio managers of the $15.7 billion Franklin Mutual Global Discovery Fund for Franklin Templeton's Mutual Series group, and Neel Kashkari, the former leader of the Office of Financial Stability that administered the Troubled Asset Relief Program (TARP).
Mr. Gross, the businessman and bond king, may be seeing the writing on the wall. He is one that knows it takes both an interest payment and changes in interest rates to make a return on bonds. For a long only bond manager, that means a decline in interest rates. With the current interest rates on U.S. Treasuries ranging from 0% to 4.5%, it will take a little magic to break even, let alone make a profit after cost. Mr. Gross, the businessman, knows that as interest rates return to "normal" money will flow out of his bond funds as fast as it has gone in. The only salvation will be to have an alternative at PIMCO to capture this outflow. Common stock funds are the solution.
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