Druckenmiller's Exit Marks End of `Old Normal' for Investing, Gross Says
Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said the planned exodus of hedge-fund icon Stanley Druckenmiller helps mark the end of the “old normal” for investing.
The departure of Druckenmiller, who has run Duquesne Capital Management LLC since 1980, and that the Chicago-based hedge-fund Citadel LLC is considering cutting fees on some funds as it attempts to attract clients, “are reflective of a broader trend in capital markets,” Gross wrote in a monthly investment outlook on Pimco’s website today. “The new normal has a new set of rules. Leverage and deregulation are fading from the horizon and their polar opposites are in the ascendant,” Gross added.
Druckenmiller told investors last month he’d been worn down by the stress of trying to maintain one of the best trading records in the industry while managing an “enormous amount of capital.” Citadel LLC, the $11.1 billion firm founded by Ken Griffin, is said to be considering cutting fees on the Kensington and Wellington hedge funds, according to two people with knowledge of the firm’s plans.
The “new normal” will be an environment where “future investment returns will be far lower than historical averages,” Gross added. “If bond investors believe that the resplendent and abundant capital gains of the past 25 years will be duplicated from yield levels of 2 to 3 percent -- well, they just haven’t been to Japan, have they?”
Ken Fisher, the billionaire chief executive officer of Fisher Investments Inc., said today that the concept of a “new normal” is “idiotic,” pitting him against Gross and Pimco Chief Executive Mohamed El-Erian, who coined the term to describe a world of high unemployment, more regulation, and the shrinking importance of the U.S. in the global economy. Gross, the founder a Pimco, and El-Erian serve as co-chief investment officers.
“We are chimpanzees with no memory,” Fisher said at the Forbes Global CEO Conference in Sydney. “The next 10 years are going to be just as good as the 1990s. The problems in this current environment we think are so different, and so new and so unique. It’s the same stupid old normal we’ve always had. We’ve got a great future.”
Even as the best route to economic prosperity is the “good old-fashioned route,” involving things like investment production and new technology development, the Federal Reserve policy makers will resort to “reflation” through a combination of low interest rates and “quantitative easing,” wrote Gross, who runs the $248 billion Total Return Fund.
Total Return Fund
The fund has returned 11 percent in the past 12 months, outpacing 69 percent of his competition, according to data compiled by Bloomberg. It gained 1.12 percent over the past month. Pimco, a unit of the Munich-based insurer Allianz SE, managed, managed about $1.1 trillion of assets as of June 30.
Gross reduced his holdings of government-related debt in the fund for a second consecutive month in August as Treasury yields fell to an 19-month low, according to the latest data available on the Newport Beach, California-based firm’s website. The Total Return Fund’s investment in the debt was cut to 36 percent of assets in August, from 54 percent the previous month.
Pension fund portfolios will likely return well below the 8 percent average that some funds assume, according to Gross. With most these portfolios split with 60 percent in equities and 40 percent in bonds, an 8 percent return would require nearly a 12 percent return on equities, given bond yields are about 2.5 percent, which isn’t probable, added Gross. Pension portfolio returns have actually averaged about 3 percent over the past 10 years, Gross wrote.
Less than half the 50 state retirement systems had assets to pay for 80 percent of promised benefits in their 2009 fiscal years, according to data compiled by Bloomberg. The U.S. recession and stock-market collapse drained about $835 billion of value from the 100 largest public funds, according to U.S. Census Bureau data.
“The most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living,” Gross wrote in the note. “Stan Druckenmiller is leaving, and with good reason. A future of low investment returns, and a heap of trouble for those expecting more, is what lies ahead.”
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