Bill Gross: Historical Returns ‘Impossible’ To Repeat

Bill Gross: Historical Returns ‘Impossible’ To Repeat

A new approach is needed as 40 years of economic trends are coming to an end, he says.

Reviewed by: Jennifer Ablan
Edited by: Jennifer Ablan

New York (Reuters) – Bond investor Bill Gross of Janus Capital Group Inc. said on Thursday the historic returns that investors have reaped for more than four decades are over, given the near end of falling rates and tremendous credit expansion.

"A repeat performance is not only unlikely, it is impossible unless you are a friend of Elon Musk and you’ve got the gumption to blast off for Mars. Planet Earth does not offer such opportunities," Gross wrote in his June Investment Outlook.

Musk, a billionaire entrepreneur, helped found Tesla Motors Inc. and PayPal Holdings Inc., and launched SpaceX in 2002 with the goal of slashing launch costs to make travel to Mars affordable.

Economic Trends Ending

Gross, who manages the Janus Global Unconstrained Bond Fund with $1.3 billion in assets, said asset returns and alpha generation have been "materially aided by declines in interest rates, trade globalization, and an enormous expansion of credit – that is debt. Those trends are coming to an end if only because in some cases they can go no further."

Gross, who co-founded Pacific Investment Management Co., also lambasted central bank policies for distorting Wall Street and Main Street.

He said capitalism has entered a new era in the post-Lehman bankruptcy period "due to unimaginable monetary policies and negative structural transitions that pose risk to growth forecasts and the historical linear upward slope of productivity."

Related Article: Bill Gross: June Investment Outlook

Low Returns, High Risk

Gross said investment returns will be low and risk will be high, and at some point investors must decide that they are in a new era with conditions that demand a different approach.

"Negative durations? Voiding or shorting corporate credit? Buying instead of selling volatility? Staying liquid with large amounts of cash? These are all potential 'negative' carry positions that at some point may capture capital gains or at a minimum preserve principal," Gross said. "Duration is unquestionably at risk in negative yielding markets."

A negative duration bond strategy can give investors a way to profit from rising rates and lower bond prices by taking a "short" bond position through Treasurys and/or eurodollar futures. Conversely, a negative-duration portfolio could underperform or even suffer losses if rates fall.

Similarly, credit risk offers little reward relative to potential losses, Gross said. "Sometime soon though, as inappropriate monetary policies and structural headwinds take their toll, those delicious 'carry rich and greasy' French fries will turn cold and rather quickly get tossed into the garbage can," Gross noted.


Jennifer Ablan is a staff writer for Reuters.