Siegel Says Gross Is Wrong in Attack on Stock Investing

Jeremy Siegel, author of “Stocks for the Long Run,” said Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., is wrong when he compares long-term returns from equities investing to a “Ponzi scheme.”

“I like Bill Gross a lot, but he’s got the economics wrong,” Siegel said on Bloomberg Television’s “In the Loop” with Betty Liu. Siegel is “obviously pushing at windmills,” Gross said today in an interview with Liu. “He belongs back in his ivory tower,” Gross said.

In his monthly investment outlook July 31, Gross said that the so-called Siegel Constant, which purports to show a long- term history of inflation-adjusted equity real returns of 6.6 percent since 1912, may be a “historical freak” unlikely to be seen again. Presuming a 2 percent return for bonds and 4 percent nominal returns for stocks, a diversified portfolio produces a nominal return of 3 percent and inflation-adjusted returns near zero, Gross, who manages the $263.4 billion Total Return Fund at Pimco, wrote in the outlook.

“Those that are looking for double-digit returns for stocks to pay education, to pay for retirement, are bound to be disappointed and that’s why the cult of equity is dead,” Gross said today in the interview with Liu. “It’s hard to see how corporations and stocks can continue to earn 3 percent more than GDP going forward and that’s only common sense.”

New Normal

As part of adjusting to a so-called new normal, Pimco’s view that the global economy has entered a period of slow growth and low investment returns, Pimco began offering equity funds to investors in April 2010. The firm moved into stocks to allow customers to diversify their holdings and as areas such as emerging markets started to outperform developed regions.

Siegel, a professor of finance at the University of Pennsylvania’s Wharton School in Philadelphia, has endorsed stocks for the long run, saying in April that he expects the Dow Jones Industrial Average to reach 15,000 in the next two years. The average was at 12,823 at 1:07 p.m. in New York. It touched a 2012 intraday high of 13,338 on May 1 and a low of 12,035 on June 4.

Pimco’s Total Return Fund gained 7.17 percent during the past year, beating 77 percent of its peers, according to data compiled by Bloomberg. The fund gained 1.65 percent in the past month, beating 81 percent of its peers.

Insufficient Returns

Monetary policy has “eliminated the possibility” of investors in bonds and stocks earning adequate returns based on their liabilities, Gross said. Those investors such as pension funds and insurance companies that have depended on a 6.5 percent constant real return from stocks “are bound to be disappointed,” he added.

“If stocks continue to appreciate at a 3 percent higher rate than the economy itself, then stockholders will command not only a disproportionate share of wealth but nearly all of the money in the world,” Gross said in his monthly note in equating the performance of stocks to a Ponzi scheme when measured over the next 100 years.

Gross in June kept the proportion of U.S. government and Treasury debt in his Total Return Fund unchanged at 35 percent of assets, according to a report July 11 on the company’s website. Mortgages were at 52 percent for a second consecutive month. Pimco doesn’t comment directly on monthly changes in its portfolio holdings.

Germany Risks

In developed nations, Gross has advised investors to favor debt of the U.K., as well as the U.S., as Germany faces risks related to the eventual costs required to end the region’s worsening sovereign and banking crisis.

Gross’s Total Return Fund attracted $2.1 billion last month and deposits into his exchange-traded fund, which mimics the flagship mutual fund’s strategy, reached the highest since the fund started. The seventh straight month of net deposits into the mutual fund contributed to $8 billion in new cash for the year through July 31, Chicago-based Morningstar Inc. said yesterday. The Pimco Total Return Exchange-Traded Fund attracted $557 million in its best month ever.

John Bogle, the founder of mutual fund company Vanguard Group Inc., said in a separate interview he agreed with Gross that investors should expect lower long-term returns than average returns produced over the last century. He said pension funds are unrealistic in targeting 8 percent returns.

“Pension funds are dreaming about a bubble that isn’t going to return,” he said. “On the other hand, buy-and-hold investing is never dead.”

Bogle, 83, has spent his career advocating diversified, long-term investing in stocks. He opened the first retail index- based mutual fund, the Vanguard 500 Index Fund, in 1974.

To contact the reporters on this story: Christopher Condon in Boston at ccondon4@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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