• `We are broke and don't even know it,' Janus manager writes
  • Health-care sector and long inflation bonds seen as hedges

Bill Gross says the U.S. will face slow growth as the Baby Boom generation ages, a trend likely to reward investors in emerging markets and health care over the long term, while punishing insurance companies and bonds for cash-strapped cities.

“Demographics may not rule absolutely, but they likely will dominate investment markets and returns for the next few decades until the Boomer phenomenon fades away,” Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund with Kumar Palghat, wrote in his monthly investment outlook Thursday. “We are broke and don’t even know it.”

The U.S. has about 75 million Boomers who were born between 1946 and 1964. The working-age share of the population, approximately ages 20 to 64, is shrinking as that generation gets older.

That will place a growing burden on workers and on the government to pay for non-working members of society, or what Gross termed “too few Millennials to take care of too many Boomers.” Programs such as Social Security and Medicare have an estimated $66 trillion in outstanding obligations, according to the 71-year-old fund manager, more than triple the nation’s current gross domestic product. Other developed economies face similar demographic challenges.

Over time, Boomers will sell off the assets they accumulated during their working years to finance their old age, diminishing returns for all investors and savers, especially if the current low interest-rate environment continues, according to Gross.

‘Cellphone App’

“We are having our cake, eating it at the same time and believing that a new cellphone app will be invented in the near future to magically deliver more of the same,” Gross wrote. “Not gonna happen folks.”

Gross, who took over the Janus fund in September 2014 after his ouster from Pacific Investment Management Co., has invested heavily in bonds of emerging-market economies. His fund gained 0.29 percent over the past year, outperforming 76 percent of unconstrained bond funds, according to data compiled by Bloomberg.

Long-term inflation will accelerate as wages rise for the health-care workers needed to serve geriatric Baby Boomers, according to Gross, a reason invest in 10-year Treasury Inflation Protected Securities.

“TIPS at 80 basis points seem like a good hedge in that regard,” he wrote. “In terms of specific equity sectors, health care should thrive, while liability handcuffed financial corporations such as insurance companies as well as the bonds of underfunded cities and states such as Chicago and Illinois, should not.”

Emerging Markets

Chicago lost its investment grade rating from Moody’s Investors Service last May because its pensions were underfunded by $20 billion.

With younger populations, emerging-market countries may provide better investment opportunities, according to Gross.

“Developed nations could and should transfer an increasing percentage of their financial assets to emerging markets to help foot the demographic bills back home,” he wrote. “Long-term then, as opposed to currently, think about increasing your asset allocation to the developing world.”

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