Bill Gross has started the New Year with his own guide on how to avoid both ‘breaking the buck’ and losing money in 2014, following a year which saw bonds take a hammering.
After suffering his worst annual performance in almost two decades, the world’s biggest bond manager has brushed himself down and set his sights on avoiding a repeat of last year.
This follows his Pimco GIS Total Return fund losing 2.89%, while the fund’s Citywire benchmark, the Citigroup WGBI (Hedged GBP), rose 2.29% in US dollar terms over 2013.
Comparing current bond investors to seesaw riders, the manager of the $244 billion fund said being on the right side of this seesaw will be key for 2014.
‘First of all the obvious: an investor should own bonds with less duration and shorter maturities when the teeter totter [seesaw] is on the losing end.’
'As a rule, less duration should mean more alpha relative to an investor’s benchmark as the interest rate worm turns and the cycle shifts upward,' he said, adding that longer-term investors like pension funds would need to keep careful watch on their underweights in this scenario.
Riding the bond seesaw in 2014 will not always be about negative returns, he stressed, and there are ways to enter positive territory.
‘Maturity extension is just one of the ways to produce carry and total return in a fixed income portfolio.'
‘In addition there are 1) credit spreads, 2) volatility sales, 3) curve and 4) currency-related characteristics that when combined with maturity can produce returns over and above those microscopic Treasury bill rates, and still keep you from “breaking the buck” under a majority of scenarios.’
‘So in 2014, look for Pimco to stress credit, curve, volatility and a tiny bit of currency while de-emphasizing 10- and 30-year maturities that are Taper affected.’
2014’s most important stat
With Fed policy likely to shape developed markets in 2014, Gross insists that rather than focus on US unemployment announcements, the Personal Consumption Expenditure (PCE) inflation rate is the most important statistic for investors to follow.
‘I consider it the critical monthly statistic for analyzing Fed policy in 2014. Why? Bernanke, Yellen and their merry band of Fed governors and regional presidents have told us so.'
'No policy rate hike until both unemployment and inflation thresholds have been breached and even then “they’re not thresholds,” they’re forks in the road that may or may not lead in a different direction.'
'If so, then 1-5 year bonds, combined with credit, volatility, curve roll down, and a dollop of currency should float a bond investor’s boat in 2014 and avoid breaking the buck in total return space.’
‘I’m not saying we’ve got a bull market here. But if PCE inflation stays below 2.0% and inflationary expectations don’t rise appreciably above 2.5%, then a 3-4% total return for 2014 is realistic.'
Gross top tips:
1) Total return bond portfolios should float above water in 2014.
2) No guarantees either!
3) Watch PCE inflation more than the unemployment rate.
4) Emphasize credit, volatility, currency and 1-5 year maturities.
5) Expect 3-4% total return for bonds.
6) If you think stocks will keep going, then keep riding. But seesaws go up and down!
The full Bill Gross January 2014 comment piece can be viewed by clicking here.