As Pimco begins to offer stock investment funds, after establishing itself as the largest bond fund manager in the world, Bill Gross sheds light on the firm’s strategic thinking.
Bonds have done well over the last 30 years, and this has earned Pimco a lot of money since many investors now favour bond investments over stocks.
Yet, the next 10 years could be much different, and Pimco doesn’t want to be stuck in last decade’s asset class.
The three-decade rally in bonds, the securities that made Gross famous, will eventually fizzle out, according to Pimco’s outlook. Gross said the rally will come to an end as nations sell record amounts of debt to fund their deficits, spurring a return of inflation and rising interest rates.
“Bonds have seen their best days,” said Gross, who anticipates returns of 4 to 5 per cent in the new normal.
The king of bonds is now talking up stocks as a better long-term investment. He said that as U.S. Treasury returns fall, investors will have to take more risk with high-yield bonds, equities and, eventually, real estate.
“If you’re talking about the next 10, 15, 20 years, there’s certainly the recognition that assets will grow faster in those categories,” he said. “Over the long term, stocks return more than bonds when appropriately priced at the beginning of an investment period.”
It’s easy to be a bit cynical here and say Mr. Gross is talking up his company’s latest product offering, as we’ve been guilty of in the past. Nevertheless, one has to admit that despite Pimco’s new move into offering stock funds, it would still benefit the firm more, from a purely marketing perspective, to continue pushing bonds over stocks given that the majority of Pimco’s business remains in bond investment. Thus a cynic’s view of Mr. Gross’s latest stocks vs. bonds assessment doesn’t hold water.