A Lifeguard for Bond Investors

Bill Gross is a good navigator in turbulent waters

Bill Gross is the "It" man of bonds. He is the "bond guru" everybody turns to for direction when the market is rattled -- or when it rallies. His monthly investment commentary to clients is more than straight shop talk. "I don't think people would read it...unless it had a little spice," he says. So instead, he muses about English literature, foreign policy, and the upcoming war with Iraq (he's against it) -- recently adding the "Sean Penn of bonds" to his growing list of nicknames.

No matter what epithet you tack on to his name, his numbers as a mutual-fund manager say much more. The Harbor Bond Fund (HABDX ), which he has run since 1987, has returned 7.74% a year, vs. the Lehman Aggregate's gain of 7.55%. It's up 9.16% annually since inception. (Gross also runs the world's largest bond fund, the $72 billion PIMCO total return bond fund with similar success. That fund is up 9.56% a year since its 1987 inception.) In short, this 58-year-old -- who got a taste for the numbers game counting cards in Las Vegas three decades ago -- has an unrivaled track record.

More turbocharged than the PIMCO Fund, the Harbor Fund blends U.S. Treasuries, mortgage-backed securities, and corporate and foreign debt. Gross uses macroeconomic analysis with quantitative techniques to find buys. For instance, Harbor put 1.5% of assets in Sprint bonds six months ago when they were trading at 59 cents on the dollar. Today, they are at par. "Investors throw the stuff away under the assumption that [it'll] never come back," he says. "There are bargains to be had, but it's dangerous swimming."

That's why investors need a lifeguard like Gross, especially now that a bear market in bonds looks to be building. Interest rates are the lowest Gross has seen in his 30-year career, while the U.S. budget deficit is fast approaching $300 billion, war looms large, and the dollar weakens.

So what's he up to now? He's lowering his exposure to higher interest rates by shortening maturities and taking on some credit risk. Gross has raised emerging-market debt to 4% of assets and junk bonds to 3%. Those investments are "not enough to sink the performance," he says, "but enough to beat the market, if we are right." Judging from the past, odds are Gross is still on the right track.

By Mara Der Hovanesian

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