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How Gurus Generate Income: Bill Gross

- By Bram de Haas

We live in a world of low yields and have for a while. Investors are finding it increasingly difficult to generate income, so invariably they have to choose between higher volatility or higher risk in their portfolios. I thought I would take a look at approaches of some well-known guru investors to see what lessons we can learn. First on my list is Bill Gross.


Bill Gross

Gross is the well-known co-founder of Pacific Investment Management (PIMCO), running the firm"s $270 billion Total Return Fund (PTTRX). After disagreements that were widely chronicled in the industry, he left to join Janus and manage Janus Unconstrained (JUCAX) in 2014.

While the returns on this safe core are modest, once interest rates change and his managed assets are not locked up for the medium to long term in depreciated bonds, he will be well-positioned. At that point, he can buy aggressively and outperform peers.

Gross used to bet heavily on interest rates remaining low, which is in keeping with Trevor Cowen"s "great stagnation" thesis. He employed a lot of non-recourse leverage through mortgage real estate investment trusts (REIT) like Annaly Capital Management Inc. (NLY) as well as closed-end funds like Gabelli Dividend & Income Trust (GDV) and Cohen & Steers Infrastructure Fund Inc. (UTF). Those bets seem to have been dialed down a bit.

Portfolio

Gross" portfolio is actually extremely defensively positioned as far as interest rate risk goes, with the majority of the portfolio in bonds that mature within three years:

In order to keep up with returns generated by peers, Gross is taking more credit risk. Note he owns virtually no AAA-rated bonds:

Finally, his sector weightings are interesting with almost no government bonds whatsoever and the fund heavily invested in short-term corporate credit:

Gross" entire portfolio is below, but a few things that stand out to me are the presence of lots of auto, financial and energy companies. It also looks like he is leaning toward companies with lots of free cash flow.

Here are what I identify as overarching portfolio themes:

  • Maintain a safe core comprising approximately 11% cash and very short-term, high-quality corporate and agency bonds.
  • Avoid medium-term bonds that are underweight.
  • Select low duration bonds (because of interest rates).
  • Balance your secure core with risky investments (barbell portfolio style).
  • Borrow heavily if interest rates are unlikely to rise much.





Holdings Weight Type
Hewlett Packard Entpr 2.85% 2.38 BOND - CORPORATE BOND
Time Warner Inc 2.14 EQUITY
Ford Motor Credit Co 2.551% 1.55 BOND - CORPORATE BOND
General Mls Inc Medterm Nts Be 6.59% 1.27 BOND - CORPORATE BOND
Seagate Hdd Cayman 3.75% 1.16 BOND - CORPORATE BOND
iShares US Preferred Stock ETF 1 MUTUAL FUND - ETF
Ford Motor Credit Co 2.943% 0.92 BOND - CORPORATE BOND
Ford Motor Credit Co 2.375% 0.9 BOND - CORPORATE BOND
Fidelity Natl Info Svcs 2.85% 0.76 BOND - CORPORATE BOND
Abn Amro Bk Nv Mtn Sr Sb 144a 144A 2.1% 0.75 BOND - CORPORATE BOND
Argentina Rep 6.25% 0.66 BOND - GOV"T/TREASURY
Aircastle 4.625% 0.63 BOND - CORPORATE BOND
Cwmbs Inc Alt 4cb 2003-12 CMO 5.75% 0.59 BOND - NON-AGENCY RESIDENTIAL MBS
Sumitomo Mitsui Bkg FRN 0.55 BOND - CORPORATE BOND
Volkswagen Intl Fin 144A 2.125% 0.45 BOND - CORPORATE BOND
General Mtrs 3.5% 0.43 BOND - CORPORATE BOND
Wells Fargo Mtg Ln Tr 2010-Rr2 CMO 5.5% 0.42 BOND - NON-AGENCY RESIDENTIAL MBS
Gmac 8% 0.42 BOND - CORPORATE BOND
Nuveen Build America Bond 0.38 MUTUAL FUND - CLOSED END
Icbcil Fin Co. Ltd. 144A 2.6% 0.37 BOND - CORPORATE BOND
Leaseplan Corporation N V 144A 2.875% 0.37 BOND - CORPORATE BOND
Csmc Mtg Tr 2006-9 CMO 6% 0.37 BOND - NON-AGENCY RESIDENTIAL MBS
Deutsche Bk Ag 2.5% 0.36 BOND - CORPORATE BOND
Stanley Black & Decker 2.451% 0.36 BOND - CORPORATE BOND
Toll Bros Fin 4% 0.35 BOND - CORPORATE BOND
Bat Cap 144A FRN 0.34 BOND - CORPORATE BOND
Wamu Mtg Cert 2007-Hy5 CMO 0.27 BOND - NON-AGENCY RESIDENTIAL MBS
Petroleos Mexicanos 5.5% 0.27 BOND - GOV"T AGENCY DEBT
Aig Global Fdg 144A FRN 0.27 BOND - CORPORATE BOND
Korea Dev Bk 0.27 BOND - GOV"T AGENCY DEBT
Mastr Alternative Ln Tr 2004-6 CMO 6% 0.27 BOND - NON-AGENCY RESIDENTIAL MBS
Downstream Dev Auth 144A 10.5% 0.26 BOND - CORPORATE BOND
Kraft Heinz Foods FRN 0.25 BOND - CORPORATE BOND
Time Warner Cable 8.75% 0.25 BOND - CORPORATE BOND
Rockies Express Pipe 144A 6% 0.24 BOND - CORPORATE BOND
At&T 2.375% 0.23 BOND - CORPORATE BOND
FNMA CMO 0.22 BOND - GOV"T AGENCY CMO
Nuveen Build America Bond Opp 0.22 MUTUAL FUND - CLOSED END
Ford Motor Credit Co 2.875% 0.21 BOND - CORPORATE BOND
Ms Mtg Ln Tr 2006-11 CMO 6% 0.21 BOND - NON-AGENCY RESIDENTIAL MBS
Provincia De Buenos Aires 5.75% 0.21 BOND - GOV"T AGENCY DEBT
Morgan Stanley 2.2% 0.21 BOND - CORPORATE BOND
Ally Finl 3.5% 0.2 BOND - CORPORATE BOND
Du Pont E I De Nemours FRN 0.2 BOND - CORPORATE BOND
Ba Alternative Ln Tr 2005-9 CMO 6% 0.2 BOND - NON-AGENCY RESIDENTIAL MBS
Nuveen Pref & Income Opps Fund 0.19 MUTUAL FUND - CLOSED END
Juniper Networks 3.125% 0.19 BOND - CORPORATE BOND
Marathon Pete 2.7% 0.19 BOND - CORPORATE BOND
Abn Amro Bk Nv Mtn Sr Sb 144a 144A FRN 0.19 BOND - CORPORATE BOND
Dominion Engy 1.6% 0.18 BOND - CORPORATE BOND
Bank of Montreal 1.75% 0.17 BOND - CORPORATE BOND
Empresa Prov Energ Elect Cba 7% 0.17 BOND - GOV"T AGENCY DEBT
General Mtrs FRN 0.17 BOND - CORPORATE BOND
Hewlett Packard Entpr 144A 2.1% 0.17 BOND - CORPORATE BOND
FNMA CMO 0.16 BOND - GOV"T AGENCY CMO
Residential Asset Sec 2007-A1 CMO 6% 0.16 BOND - NON-AGENCY RESIDENTIAL MBS
FNMA CMO 0.14 BOND - GOV"T AGENCY CMO
Toronto Dominion Bk 1.85% 0.14 BOND - CORPORATE BOND
Ally Finl 3.25% 0.14 BOND - CORPORATE BOND
FNMA CMO 0.13 BOND - GOV"T AGENCY CMO
Jp Morgan Mtg Tr 2005-S3 CMO 5.75% 0.13 BOND - NON-AGENCY RESIDENTIAL MBS
FHLMC CMO 0.13 BOND - GOV"T AGENCY CMO
Cwalt Inc 2006-45t1 CMO 6% 0.11 BOND - NON-AGENCY RESIDENTIAL MBS
Duff&Phelps Global Utility Income 0.11 MUTUAL FUND - CLOSED END
Icbcil Fin Co. Ltd. 2.6% 0.1 BOND - CORPORATE BOND
FNMA CMO 0.1 BOND - GOV"T AGENCY CMO
Cwmbs Chl Mtg Tr 2006-13 CMO 6.25% 0.1 BOND - NON-AGENCY RESIDENTIAL MBS
FNMA CMO 0.1 BOND - GOV"T AGENCY CMO
Bear Stearns Alt-A 2005-4 CMO 0.1 BOND - NON-AGENCY RESIDENTIAL MBS
FNMA CMO 0.09 BOND - GOV"T AGENCY CMO
Suntrust Bks 2.35% 0.09 BOND - CORPORATE BOND
Cwalt Inc 2007-22 CMO 0.09 BOND - NON-AGENCY RESIDENTIAL MBS
Wamu Mtg Cert 2006-Ar6 CMO 0.09 BOND - NON-AGENCY RESIDENTIAL MBS
Rfmsi Series Tr 2006-S10 CMO 5.5% 0.08 BOND - NON-AGENCY RESIDENTIAL MBS
Cwalt Inc 2006-5t2 CMO 6% 0.07 BOND - NON-AGENCY RESIDENTIAL MBS
Jp Morgan Mtg Tr 2005-S3 CMO 5.5% 0.07 BOND - NON-AGENCY RESIDENTIAL MBS
Wells Fargo Mbs 2007-8 CMO 6% 0.07 BOND - NON-AGENCY RESIDENTIAL MBS
FNMA CMO 0.07 BOND - GOV"T AGENCY CMO
Brocade Communications Systems Inc 0.07 EQUITY
FHLMC CMO 0.07 BOND - GOV"T AGENCY CMO
Cwalt Inc 2006-4cb CMO 5.5% 0.06 BOND - NON-AGENCY RESIDENTIAL MBS
Jp Morgan Mtg Tr 2007-S1 CMO 6% 0.06 BOND - NON-AGENCY RESIDENTIAL MBS
FNMA CMO 0.06 BOND - GOV"T AGENCY CMO
FNMA CMO 0.06 BOND - GOV"T AGENCY CMO
Banc Amer Fdg 2007-2 CMO 0.06 BOND - NON-AGENCY RESIDENTIAL MBS
FHLMC CMO 0.05 BOND - GOV"T AGENCY CMO
GNMA CMO 0.05 BOND - NON-AGENCY RESIDENTIAL MBS
GNMA CMO 0.05 BOND - NON-AGENCY RESIDENTIAL MBS
FHLMC CMO 0.05 BOND - GOV"T AGENCY CMO
Banc Of Amer Fdg 2006-7 CMO 0.05 BOND - NON-AGENCY RESIDENTIAL MBS
GNMA CMO 3.5% 0.05 BOND - NON-AGENCY RESIDENTIAL MBS
Indymac Inda 2006-Ar1 CMO 0.05 BOND - NON-AGENCY RESIDENTIAL MBS
FHLMC CMO 0.05 BOND - GOV"T AGENCY CMO
Lloyds Bkg Grp 3.1% 0.04 BOND - CORPORATE BOND
Structured Asset Secs 2005-14 CMO 0.04 BOND - NON-AGENCY RESIDENTIAL MBS
Ms Mtg Ln Tr 2006-17xs CMO 0.04 BOND - NON-AGENCY RESIDENTIAL MBS
FHLMC CMO 0.04 BOND - GOV"T AGENCY CMO
Cwalt Inc Alt Ln Tr 2006-14cb CMO 6% 0.04 BOND - NON-AGENCY RESIDENTIAL MBS
Irsa Propiedades C 5% 0.03 BOND - CORPORATE BOND
JPMorgan Chase 6.3% 0.03

BOND - CORPORATE BOND



Disclosure: No positions in any stocks discussed.

This article first appeared on GuruFocus.