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The Bond King
Pimco's Bill Gross has made billions of dollars from a single, 48-ounce asset--a beautiful mind.
FORTUNE
Monday, March 4, 2002
By David Rynecki
Bill Gross is in the feathered-peacock position. In a glass-walled room with a perfect view of the Pacific Ocean, the highest-paid money manager in the world is standing on his head--his legs split almost horizontally. His muscles are twitching under the strain. Sweat is trickling into his mustache. His face has turned beet red, yet he's able to hum along to Van Morrison's rhythmic "Back on Top." All the while, his personal yoga instructor, a former Marine turned guru named Geo Takoma, chants breathlessly: Free your mind of the outside world. Free your mind of work and responsibilities. Have no thoughts of the bond market.
Easier said than done. This is, after all, a man who oversees the investment of more than $350 billion in bonds--and whose words can spark rallies and ruptures in a $14 trillion market.
Minutes later, we're flying down the Pacific Coast Highway in a night-black Mercedes CL500 on our way to the Newport Beach offices of Pimco, the giant investment firm where Gross serves as chief investment officer and resident sage. Gross is at the wheel, his unknotted Ferragamo tie hanging like a scarf around his open-collared shirt, a glass of springwater in his free hand. As we wrap around curves, he speaks freely about his latest moves: a coup on eurodollars, a $250 million profit the firm made shorting Argentina bonds before anyone anticipated a credit default. And then there's The Bet, several hundred billion dollars spread across thousands of individual securities in a maze of futures, swaps, mortgages, and enough acronyms to fill a dictionary. The thesis driving Gross' current bond strategy is not comforting for those of us expecting a Nasdaq rebound anytime soon: Corporate profitability, the fulcrum that lifts stocks, is going to remain lousy, and economic growth will be stagnant. In such an environment the right mix of bonds could outperform all other financial instruments.
It's a bold call, but one undertaken with the measured steps of an investor who has survived longer than just about anyone else. Heading up to Pimco's trading floor from the parking lot, Gross sounds almost prophetic. "This is a time I've been waiting for," he declares. "This is when a lot of managers are going to realize that climbing to the top means very little. Getting there doesn't matter. The ultimate victory is staying there."
Warren Buffett, John Neff, Bill Miller, Peter Lynch--the stock market has always had dominant personalities whose long-term success becomes legend. In the bond market that dominant personality is Gross. At 57, he is the philosopher-king of bonds--combining big-picture wisdom with day-to-day performance. The chief architect and strategist for the world's biggest bond-management firm, his core portfolios have risen at an average annualized rate of 10.6% since 1973. Stop for a moment and think about that number. Bonds are supposed to be the tortoise of the investment race, not the hare. Yet not only has Gross beaten the benchmark Lehman Bros. bond index by 1.5 percentage points a year during the period, he's not all that far behind the main stock market barometer either: The S&P 500 has risen on average 13% a year since Gross began trading bonds. Equally impressive, Gross has had just three negative years during that stretch, with an average decline of 2.25%. By contrast, the S&P has suffered eight, averaging a 12.5% drop each.
Gross has an unusual combination of strengths. Like Buffett and Neff, he has mastered the craft of the value investor, and much of his stellar performance derives from his reliance on a clear set of mathematical formulas that determine value and reduce knee-jerk emotion. Like Lynch, he has become so closely identified with an organization that, to many, he is the organization. And like Miller, he is unmatched in exploiting weakness.
But unlike any of his peers in the stock market, Gross has compiled his record for brilliance in an area of the market that appears agonizingly dull, a haven for geriatric coupon clippers and math nerds. Whereas the rise and fall of a stock has a kind of inherent human drama--based on Wall Street's ever-changing "story" for a company--bond prices are driven by mathematical equations, tied to interest rates and inflation. Not exactly flashy stuff.
Then again, it ain't 1999 anymore; flash and drama are now decidedly unfashionable. In the two years since the equity bull market went bust, bonds have made a remarkable comeback among investors. Debt has replaced growth as the watchword of choice. The reason for that is obvious: Bonds have beaten stocks for two consecutive years, rising 21% over the period, vs. a 22% decline for the S&P 500. Such a winning streak has not been registered since the recession-plagued days of 1981 and 1982. Though forecasting a third year of outperformance--something that has never happened in the modern era--is a risky bet, one thing is clear: The momentum that was so heavily weighted on the side of stocks for so long has shifted. Stocks are no longer the only box to check in a 401(k) plan. In a market that is treacherous and uncertain, bonds play the role of the married man with children who wears a belt and suspenders--he might have nubby knees and thinning hair, but he's reliable.
And no one is more reliable than Gross, a man who compartmentalizes and analyzes every action so that it fits into a routine so damn monotonous that it would drive most people to distraction. |
