When the legendary “bond king” Bill Gross completely abandoned treasury bonds in his Pimco Total Return Fund earlier this year, he was applying decades of bond market experience and knowledge.
Unfortunately, he guessed completely wrong on the health of the economy and price of US debt. Which is why his fund is trailing a low-cost, low-profile Vanguard index by an embarrassing margin.
This Bloomberg article “Gross Trails Index Fund, Misses Treasuries Rally” describes how the Total Return Fund, the world’s biggest mutual fund, has returned 1.4 percent this year (through October 4), versus 8.9 percent for the Vanguard Intermediate Term Bond Fund.
Gross isn’t alone in trailing the Vanguard fund, which tracks – rather than trying to beat – the performance of Barclays Capital U.S. Aggregate Bond Index. Year to date, the Vanguard fund has outperformed 99 percent of intermediate bond funds tracked by Morningstar. Yes, 99 percent.
Perhaps this helps to dispel the notion that index investments produce only “average” returns. Index funds, both for stocks and bonds, frequently beat their actively managed counterparts. Indexes typically have two big advantages. First, lower management, research and transaction costs, and second, no egregious misses caused by guessing wrong.
Guessing wrong for all the right reasons
Gross guessed wrong. As he describes, it was a “mistake to bet so heavily against the price of U.S. government debt.” A good choice of words in calling it a “bet,” I’d say. As in gambling with billions of dollars of other people’s money.
Gross is certainly the most famous name at the bottom of the performance list this year. Bill Miller understands that feeling. For 15 years in a row, Miller, manager of Legg Mason’s Capital Management Value Trust, beat the S&P 500, even after fees. That unbelievable streak ended in 2005.
Since then the fund has, in a word, bombed. According to a MoneyWatch article in 2010, Miller has “trailed the S&P 500 by more than 9 percent annually over the past five years, and by 2.6 percent annually over the past decade, which places his fund in the 99th and 94th percentile of all of its peers for the respective periods.”
The 15-year winning streak, perhaps the most impressive track record in modern investing, surely attracted many investors to Miller’s fund in 2005. What a price they have paid since.
Hares are human too
Miller and Gross are well known hares who earned their reputations by winning. But it turns out hares can be human too, and when they make mistakes, even unremarkable tortoises can leave them in the dust.
I know many investors will be attracted to the next generation of star managers, but I urge caution. Because no matter how much experience they have, backed by limitless knowledge and expensive research, they can still guess wrong on a stock, a sector, or the whole economy.
Call me crazy, but I just don’t think guessing is a sound investment strategy.
This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.
Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.
Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.
Any securities listed in this article are for illustrative purposes only. These securities may or may not be held in actual client accounts. Specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and the reader should not assume that investments in the securities identified and discussed were or will be profitable.
An investment cannot be made directly in an index.
delivered to your inbox
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.