Bill Gross joined the growing ranks of money managers expressing concern that a decline in liquidity could exacerbate losses for fund investors during a market decline.
While legislation after the 2008 financial crisis has made banks safer, the risk has merely been transferred to investment funds that function as a “shadow banking system,” he wrote in an investment outlook for Janus Capital Group Inc. today. Investors should hold enough cash to avoid having to sell fund holdings during a panic.
“Long used to the inevitability of capital gains, investors and markets have not been tested during a stretch of time when prices go down,” Gross wrote in the outlook. “It’s then that liquidity will be tested.”
Gross, the manager of the $1.5 billion Janus Global Unconstrained Bond Fund, joins money managers including BlackRock Inc. Chief Executive Officer Larry Fink, who warned that the retreat of banks as counterparties could create severe volatility. Regulators are looking to ensure that a sudden stampede out of funds won’t result in a downward price spiral that threatens the financial system.
A destabilizing event could precipitate a wave of selling that could feed on itself, Gross wrote. Possible triggers for a selloff could include a deterioration in Greece, which could lead to concerns about other European countries; monetary policy steps that drive bond prices lower and the dollar higher; and a crisis in emerging markets or China.
Gross, 71, was chief investment officer at Pacific Investment Management Co. until his sudden departure in September, when he joined Denver-based Janus.
Pimco has disputed the notion that mutual funds are subject to client “runs” in times of market stress. In a May 29 letter to the Financial Stability Board, which is working on guidelines for regulating big asset managers, Pimco CEO Douglas Hodge said he was unaware of any historical example of a mutual fund that couldn’t meet client redemptions.
Gross said that regulators have “ample cause to wonder” about the risk of an investor run on funds. The obvious risk, he wrote, “is that all investors cannot fit through a narrow exit at the same time.”
To help manage liquidity, BlackRock, the world’s largest money manager, has increased the amount its mutual funds can collectively borrow to meet withdrawals to $2.1 billion as of November from $500 million in early 2013, regulatory filings show. Eaton Vance Corp., Goldman Sachs Group Inc. and Guggenheim Partners are among the firms that have also arranged new borrowing agreements or bolstered existing ones in the past year.
BlackRock is also seeking government clearance to set up an internal program in which mutual funds that get hit with client redemptions could temporarily borrow money from sister funds that are flush with cash, according to a filing last week.
Pimco, facing record redemptions after the departure of Gross, used a provision in the Investment Company Act of 1940 to sell about $18 billion of assets held by the Pimco Total Return fund to other Pimco funds, a filing in May showed.
Gross, who used to run Pimco Total Return and built it into the world’s largest fund with $293 billion in assets at its peak in 2013, is now managing the much smaller Janus Global Unconstrained Bond Fund. That fund lost 0.2 percent from the time Gross took it over Oct. 6 through June 28, trailing 58 percent of comparable funds, according to data from research firm Morningstar Inc. The $9 billion Pimco Unconstrained Bond Fund gained 0.9 percent, better than 72 percent of rivals.