Janus’s Gross Says Face Earthbound Gains or Go to Mars With Musk

  • Four-decade era of high returns and low risk is history
  • Shorting corporate credit, buying volatility are on menu

Bill Gross: Why I'm Trying to Go Short on Credit

After four decades of returns fueled by expanding credit and falling interest rates, standard investments are unlikely to cut it anymore, according to Bill Gross.

Investors will eventually have to consider shorting corporate credit, buying securities with negative duration, hedging against market volatility or keeping large cash positions to preserve capital, the Janus Capital Group Inc. fund manager wrote in his monthly investment outlook published Wednesday.

Bill Gross

Photographer: Patrick T. Fallon/Bloomberg

Gross, 72, who built a career trading bonds during a 40-year period of declining interest rates, said the fixed-income market’s historical 7.5 percent returns are a thing of the past. Risks are rising and rewards ebbing for long-term investments because of low interest rates, high leverage and inflated asset prices, according to Gross, who runs the $1.3 billion Janus Global Unconstrained Bond Fund.

“At some point the ‘Intelligent Investor’ must decide that we are in a new era with conditions that demand a different approach,” Gross wrote. “Negative durations? Voiding or shorting corporate credit? Buying instead of selling volatility? Staying liquid with large amounts of cash? These are all potential ‘negative’ carry positions that at some point may capture capital gains or at a minimum preserve principal.”

‘No Further’

Investment returns in the past decades were fueled by widening global trade, expanding credit and falling interest rates, according to Gross. Those trends are finally ending.

“Those trends are coming to an end if only because in some cases they can go no further,” he wrote. “A repeat performance is not only unlikely, it is impossible unless you are a friend of Elon Musk and you’ve got the gumption to blast off for Mars. Planet Earth does not offer such opportunities.”

Gross isn’t alone in his cautious outlook. The multinational Organisation for Economic Cooperation and Development warned Wednesday that the global economy is slipping into a self-fulfilling “low-growth trap” where ultra-loose monetary policy risks doing more harm than good. Gross’s former firm, Pacific Investment Management Co., issued a long-term outlook Wednesday cautioning “that monetary policy exhaustion and an overhang of debt in some major economies pose material threats to the sustainability of the global recovery and financial stability.”

Gross’s fund, currently leaning toward fixed-income instruments and derivatives with short-term maturities, has returned about 3 percent this year and 1.9 percent since he took over management in October 2014 after an acrimonious exit from Pimco. The fund, which Gross co-manages with Kumar Palghat, had 259 holdings with an effective duration of 1.1 years as of April 30, according to the Janus website.

Selling insurance against market volatility has been one of Gross’s favored tactics, a practice less rewarding than it used to be. Measures of volatility, such as the Chicago Board Options Exchange Volatility Index, or VIX, are near historical lows, “meaning there is little to be gained by selling outright volatility or other forms in duration and credit space,” he wrote.

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