Photo: Sam Ro, Business Insider
Last Thursday, bond legend Jeffrey Gundlach gave his first presentation of 2012.During the Q&A, someone noted that a “competitor’s monthly letter is dour, gloomy as ever.” The person followed that by asking if Gundlach expected 2012 bond fund returns to be lousy.
To be clear, no one, including Gundlach, named any names. But we find it hard to believe that Gundlach and the questioner weren’t referring to Bill Gross’ uber gloomy note that was published days earlier.
In response to the question, Gundlach answered that he did indeed expect most bond fund returns to be lousy. This was largely due to his expectation for a shift to indexation in the industry.
Lately, Gundlach has been a harsh critic of bond indexing because so much of the returns are based on the the performance of short-term Treasury securities that offer little to no return.
“Indexing in bonds just never makes any sense,” argues Gundlach. He says investors are just as well off stashing their cash in a “coffee can.”
Why The Shift
Earlier in the call, Gundlach noted that nearly 95% of active bond fund managers underperformed the Barclays aggregate bond index in 2011. “You basically can’t do that again [in 2012] without putting your whole business at risk,” said Gundlach.
This fear of underperforming the benchmark again is spurring the widespread shift toward indexing strategies. Gundlach described it as “taking a knee” in 2012.
Gundlach warned that for fund managers, there are often “other motives than return maximization.”