Bill Gross Sends Last Missive On Bonds - And Fees

by: Lipper Alpha Insight
Summary

The co-founder of Pimco, who once ran a fund with $293 billion of assets, is retiring from Janus Henderson, the asset manager he joined in 2014.

Janus Henderson's annual fee was 0.78 percent, meaning on simplified math that the firm pocketed twice as much as investors received.

Investors may never again be so generous to an active bond-fund manager.

By Breakingviews

Bill Gross is yielding to the times. The co-founder of Pimco, who once ran a fund with $293 billion of assets, is retiring from Janus Henderson, the asset manager he joined in 2014. The 74-year-old is entitled to step back, but it's hard not to see the move as a final missive on government bonds - and asset-management fees.

At Pimco, owned by Allianz, Gross helped build a bond-investing powerhouse. He was known as the "Bond King" and accumulated assets, impressive returns and personal wealth. As his investment performance and relationships at Pimco deteriorated in the run-up to his acrimonious departure, he devoted one of his rambling investor letters to his deceased cat, a female named Bob.

For most of his career, Gross was in the right place at the right time. From the mid-1980s until just a few years ago, yields steadily fell, barely shaken off course even by the financial crisis. That meant bond prices were rising - a tailwind for any fund manager.

But times have changed. Assets in his Janus Henderson unconstrained bond fund sank below $1 billion at the end of 2018, with performance falling short of the 0.91 percent annual return on its three-month Libor benchmark in the nearly five years since inception. Even Class I fund units, with relatively low fees, only returned an annualized 0.38 percent.

Yet Janus Henderson's annual fee was 0.78 percent for those Class I units, meaning on simplified math that the firm pocketed twice as much as investors received.

That helps explain why, as in equities, investors are switching to low-cost, passive index-tracking holdings. Among U.S. bond mutual funds and exchange-traded funds, the proportion of assets tracking indexes and the like was 26 percent at the end of 2017, up from less than 5 percent in 1995, according to a working paper from the Federal Reserve Bank of Boston.

Gross has done well enough to have made, by Janus Henderson's account, $800 million in philanthropic donations over 20 years and still have a net worth of $1.5 billion, by Forbes' tally. And he has a $390 million family foundation to run in retirement. That's a remarkable achievement. Investors may never again be so generous to an active bond-fund manager.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.