Bill Gross: Dump BND & AGG; Buy BOND

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Bill Gross, the famed money manager behind the $274 billion Pimco Total Return Fund, did some hard selling today, saying the time is ripe for investors to dump popular bond ETFs and simply go for the best; namely, the $2.7 billion Pimco Total Return ETF (BOND) he himself manages.

Specifically singling out hugely popular exchange-traded funds such as the Vanguard Total Bond Market ETF (BND) and the iShares Barclays Aggregate Bond Fund (AGG), Gross told attendees of IndexUniverse’s Inside Fixed Income conference that he and his team at Pimco watch BOND, AGG and BND obsessively, and that the better of the three funds is clear.

“If you have clients in BND or AGG, get them over [to BOND],” Gross told the audience of financial advisors. “I don't care about the fees. Just bring them over because you'll be helping them out. I can't guarantee it … but I think it's a pretty good bet.”

Gross was referring to BOND’s relatively pricey expense ratio relative to the Vanguard and iShares ETFs he singled out. BOND costs 0.55 percent a year, while iShares’ AGG and Vanguard's BND cost 0.20 percent and 0.10 percent, respectively.

He said beating indexed bond funds is still achievable, but the task is growing harder as BOND grows bigger. The fund, which launched on March 1, 2012, is the second-fastest-growing ETF in history, after the SPDR Gold Shares (GLD), the $74 billion physical gold ETF.

Gross highlighted how BOND is not constrained to index rules like BND and AGG.

“So AGG and BND basically have to buy 40 percent Treasurys and the Treasurys yield 90 basis points. I look at the numbers compulsively, like I told you, and I see the volume and the total capitalization of $15 billion here and $15 billion there, and then I look at $2.7 billion of BOND, and even though it's a raging success, I say, 'Are these people crazy?’ Where is this $30 billion and why isn't it immediately being transferred into BOND? Their universe is basically a 40 percent Treasurys universe yielding 90 basis points. You can't produce return out of that type of yield.”

Gross was the keynote speaker at the conference, and covered a wide range of topics in his nearly hour-long appearance, including Pimco’s “New Normal” thesis on how the developed world is in for a period of relatively slow growth, and how the Federal Reserve will extricate itself from the easy-money policies it has embraced since the economy collapsed in September 2008.

Gross said that, overall, it made no sense to fight the Fed, regardless of one’s view of inflation. The longer-term issues regarding this era of zero percent interest rates and quantitative easing came up later during the question and answer period.

“Your question is really, ‘Can Bernanke pull it off?’” Gross said in response to a question from a member of the audience. “I think so, we’ll just have to see. It’s safe to say that up until now, in a period of significant deflationary pressures, he has managed to produce 2 percent inflation in the United States and that Draghi has managed to do the same thing in euro-land.


 

“So, the central banks have done a good job reflating the economy, and the question is from this point forward, Ccan they continue doing it? They’re sort of running out of ammunition, and the homeowner has to take the bait, buy a home and create a new mortgage that the Fed can in turn buy. So it depends to some extent on the real economy,” Gross added.

The inaugural Inside Fixed Income conference is being held today at the Marriott Hotel ' Spa in Newport Beach, Calif., where Gross’ Pimco is based.

Arnott Likes Emerging Markets Debt

Other speakers at the conference included Rob Arnott, founder of the fundamental indexing firm Research Affiliates, as well as Guggenheim Investments’ Chief Investment Officer Scott Minerd.

Arnott talked about his version of the New Normal thesis, which he refers to as the “Three-D Hurricane” of debt, deficit and demographics. Those three variables will take time to address, meaning an extended period of slow growth is almost guaranteed in much of the developed world.

“Right now, I think that the rewards associated with emerging markets debt are pretty attractive relative to the developed world when you adjust to reflect the debt-coverage ratios,” Arnott said in response to an audience question about some of the most current prospective fixed-income opportunities.

“You’re getting paid a premium for bonds where the debt-coverage ratios are vastly better than for the developed world,” Arnott added. The debt-coverage ratio refers to the amount of debt relative to the size of a given country’s economy or company’s balance sheet.

The conference concluded with a one-on-one discussion between Guggenheim Investments' Scott Minerd and IndexUniverse’s President of ETF Analytics Matt Hougan. The two took on the topic “Fixed Income:Where Are the Opportunities Today?”


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