Bill Gross and Past Performance

        Bill Gross is one of those bright and driven men who arrives on the right stage at the right time, and maybe even leaves at the right time. Gross has had a long and colorful career to this point, founded Pimco and raised it into a bond fund colossus. He built his flagship fund, the Total Return Fund on the back of the great modern bond cycle. As we reach the end, and beyond, of the bond arc, so apparently do we reach the same point in Gross’s career and that of his fund. The story of his performance, as opposed to his investors’ return is described by Jason Zweig in a recent Wall Street Journal column (available online to Wall Street Journal subscribers).

Reading Zweig’s article, I was struck by a shocking statement.

Between the beginning of 2008 and the end of 2012, according to research form Morningstar, investors poured more than $101 billion of new money in Pimco Total Return… In October 2009 alone, Total Return took in $5.8 billion, a sum greater than all but 51 out of the 1,059 bond funds then in existence.

Let’s look at some investment history since 2009.

Fund                                                      5 Year Return

Pimco Total Return                          5.6%

DFA US Large Company                 16.79

DFA Global 60/40                             10.41    

         A diversified portfolio of large companies tripled the return of the Total Return fund, and even a conservative portfolio of stocks and bonds almost doubled the bond fund’s return without moving into or out of anything.

         In defense of the apparently indefensible, the investing environment in 2009 was pretty rough. The Total Return fund had a couple of things going for it, mainly its past performance and the fact that it was not a stock fund.

         Since 1987, the Total Return Fund generated an annual performance of 7.9%.  Those investing after 2008 had a return of 5.6%.  Getting into a fund based on past return is one good way to underperform the performance of the actual fund, but there are others. Picking winners after the fact will not improve your return, and in this case it is quite the opposite. A consistent mix of stocks and bonds in this time frame would have forced a purchase of more stocks and would have led to a better result.

Written by Bob Stowe, CFP®