Pacific Investment Management Co., manager of the world's largest bond fund (PTTRX), filed with the SEC to expand its holdings to include equity related investments as soon as the second quarter of 2011. Thus, "bond king" Bill Gross is trying to diversify away from bonds into stocks, which implies that Pimco's "new normal" may be more of a marketing slogan than an investment guideline. This is a good move for his investors, although it comes more than a year late for the rally in these assets and the plunge in bond prices, including Pimco's own bond funds.
Outsiders have long wondered if Pimco's public statements were not slanted to favor bonds as an investment vehicle. Although Bill Gross has managed the Pimco Total Return Bond Fund superbly for many years, his often quoted thoughts on stocks typically provided a negative bias. That wasn't shocking for a bond guy. Nor has it been surprising that Pimco's leadership, mostly Gross and Mohamed El-Erian, have promoted the "new normal," a view that economic growth would be quite low, mostly around 2% annually or just 3% to 4% in nominal terms, for the next several years. Such a view that economic growth would be so muted for many years would favor bonds as an investment class.
The new normal thesis garnered media attention, but never gained much traction. The new normal thesis was readily dismissed as theoretically unsound, and anecdotal by academic economists. Professional money managers simply recognized it as good marketing on behalf of bonds. So it comes as a shock that Pimco would now seek to have its flagship bond portfolio acquire equity sensitivity little more than a year after publishing the "new normal" thesis in October 2009. Equity exposure is entirely inconsistent with the new normal thesis. If growth were as constrained as suggested by the new normal, competition would keep prices down and compress corporate profit margins and profitability, as firms seek to eke out sales in a slow growth environment that is suffering from excess capacity of labor and industrial capacity. The new normal thesis implies that equities should be avoided, not embraced. So it makes little sense that Pimco would now buy equity sensitive bonds while still pushing its new normal view of the economy.
We bought convertibles and preferreds aggressively beginning in late 2009, the very investments Pimco now seeks to buy, as interest rates plunged to levels we considered unsustainable in an economic recovery. We judged the prospects for recovery inevitable, as the Fed and the Treasury adopted policies at every step to promote stronger economic growth. In fact, these very holdings provided returns that contributed to our strong portfolio performance over the past two years. So, it is good for their investors that Pimco has come to this realization. These securities are likely to perform less well in the future however, although still far better than the bonds that have been Pimco's traditional mainstay.