Rolling the dice

Soros Pulls Out. What Now for Bill Gross?

The 'Bond King' has to cope with falling returns from his new fund and pursue his case against Pimco.

This week’s news that George Soros has taken out his $500-million investment from Bill Gross’ Janus Global Unconstrained Bond Fund has once again put Pimco’s founder and former head in the spotlight.

Low returns

According to sources cited by the Wall Street Journal, the reason for the withdrawal was the uneven performance of the Janus fund, a claim backed by facts: in the 12 month period ending November, the Janus Unconstrained Fund has lost 1.5 per cent of its value, versus a 0.22 per cent gain for the benchmark it uses, the ICE Libor 3-Month USD, according to data from Morningstar. Among its peers, the fund ranks in the lowest third, behind 74 per cent of similar organizations.

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Soros’ move has raised a lot of questions amongst the other investors in the Janus fund, which according to Morningstar counts $1.4 billion under management, and net inflows of $35.6 million in the 12 months up to this September. It also had net outflow of $46.5 million for September alone. And now this – a $490-million outflow confirmed by industry data providers.

Flexibility dampened by lower-than-hoped-for performance

When Mr Gross left Pacific Investment Management Co. (Pimco) last year, he praised his new gig with Janus for its greater flexibility (the Pimco Total Return fund only dealt in US Treasury and corporate debt). Janus is a mutual fund, which manages some $185 billion of assets – and which, when Gross came on board, had only $13 billion. It seems that the happy times were not to last though. Amidst low returns and a drop in value, last month saw the ‘Bond King’, as Gross is known in the industry, launching a lawsuit against his former colleagues and their new owner, Allianz, claiming they owe him money- and a lot of it. The size of the compensation that Gross is seeking is $200 million.

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Gross seeks $200m in compensation from Pimco

The year hasn’t been easy for Janus and Gross, even though Pimco clients pulled out substantial sums from their old fund after his departure. One reason why it hasn’t been easy could be found with the Fed, which Gross, in his monthly outlook for November, criticized for keeping interest rates near zero. Only to be expected – low rates harm the attractiveness of interest-yielding investments such as bonds, Mr. Gross’ forte.

Banks should help improve bond yields, says Gross

In his outlook, Gross said: “My primary thesis … remains that capitalism does not function well, and profit growth is stunted, if short term and long term yields near the zero bound are low and the yield curve inappropriately flat.” He went on to urge that banks “…should produce a much steeper yield curve and a higher policy rate to allow banks, financially oriented businesses, as well as household savers themselves to increase margins and restore profit and disposable income growth.”

He’s hardly alone in his resentment of the Fed’s policy but the fact remains that his new fund is underperforming in the overall bond fund sector. If it’s any consolation, however, his former company, Pimco, is doing even worse for its size (according to Morningstar figures cited by the Financial Times). In fact, Pimco relinquished its top spot among bond funds earlier this year, as Finance Magnates reported, overtaken by Vanguard Total Bond Market. The latter mainly works with retail investors and 401(k) schemes, that is, investors who are much more likely to take the long-term view rather than insist on quick returns.

Future remains uncertain

Be all that as it may, it seems that the near-term future for Gross and for his Janus fund remains uncertain. The Fed is unlikely to raise rates before the end of the year, given the reluctance it has demonstrated on the matter so far. The lawsuit against Pimco “lacks merit”, according to Allianz, but Gross insists that he was effectively fired because he refused to go along with calls for a riskier policy. Despite the huge compensation he is seeking, some media commentaries have it that what Gross actually wants is moral satisfaction; he’s already said that whatever compensation he receives, will go to charity. This compensation, by the way, he says is the quarterly bonus he was owed but failed to get because he was ousted five days before the end of the preceding quarter.

The ousting happened last year, so why is Gross seeking his rights only now? It may or may not have something to do with how his new fund is faring, especially after the Soros funds were withdrawn some time in the second quarter, according to Janus financial reports. There is a wide scope for speculation and anyone is free to draw their own conclusions.

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