If you have been seeking unequivocal proof that the 30 year bull market for bonds is over, look no further than this WSJ headline: Bond-King Pimco Plans to Push ‘Alternative Funds’.

Think about what this means: From 1980 to 2013, PIMCO enjoyed three decades of rising bond prices — read falling interest rates — and accumulated a massive pool of over $2 trillion in assets under management (AUM). Founded in 1971, the firm rode the bond Bull better than anyone else. The bond bull also led them to manage the world’s largest mutual fund, their Total Return Fund, which has amassed $242.7 billion in assets.

To me, the fact that PIMCO is embracing alternative investments signals the end of the bond bull market. While some folks may want to blame a change in culture due to Allianz acquiring PIMCO, let me remind you that was almost 14 years ago.

The WSJ notes the impact of the hilariously misnamed JOBS Act:

“Douglas Hodge, Pimco’s chief operating officer, called alternative investments “a very important area for us” in an interview with The Wall Street Journal. He said the firm is responding to increased demand from investors of all types, as well as to changing regulations.

But the push into riskier, more-complex products marks a shift for the firm, whose bond funds have long been seen as some of the safest and most reliable on the market.

The SEC moved last month to lift a restriction prohibiting hedge funds, private equity firms and other businesses from publicising shares in private offerings as part of the Jumpstart Our Business Startups Act, effective September 23. That allows Pimco and others to pitch alternative products more directly to institutional investors as well as wealthy individuals.”

I thought PIMCO had jumped the shark when Bill Gross blackmailed Treasury into guaranteeing Fannie & Freddie’s paper. Note that these were not government owned entities but rather were publicly traded firms. The implied guarantee was forced to become an actual guarantee, costing taxpayers 100s of billions of dollars so far.

bill-grossWith their foray into hedge funds, any suspicion you may have had that the bond bull market was in the 9th inning should be laid to rest.

So too are the days of PIMCO as a purveyor of “safe and reliable investments.” The embrace of riskier, more-complex products can only mean higher costs and lower returns for PIMCO. Say it with me: 2 & 20 generates plenty!

The loser in this are the institutional investors who have come to rely on the “bond king” for safety and security.  The winner? The new bond king, Jeff Gundlach’s and his firm Doubleline. We swapped some holdings form PIMCO to Doubleline last year; I suspect that we will eventually move the rest in that direction.

Here’s a fun bet: Who wants to guess how much AUM Doubeline takes away from PIMCO over the next decade…?

 

 

Source:
Bond-King Pimco Plans to Push ‘Alternative Funds’
Kirsten Grind
WSJ,  August 28, 2013
http://online.wsj.com/article/SB10001424127887324324404579040992035685578.html

Category: Fixed Income/Interest Rates, Hedge Funds, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “Proof the Bond Bull is Over: PIMCO Selling Hedge Funds”

  1. [...] investor and acclaimed writer Barry Ritholtz on a recent development that marks the final nail in the coffin of the bond bull [...]

  2. denim says:

    “I thought PIMCO had jumped the shark when Bill Gross blackmailed Treasury into guaranteeing Fannie & Freddie’s paper. Note that these were not government owned entities but rather were publicly traded firms. The implied guarantee was forced to become an actual guarantee, costing taxpayers 100s of billions of dollars so far.”

    Barry,
    Follow the money for us. Since the housing and inherent mortgage market is the single largest asset that Americans are invested in, protecting it is important to each of us. A “cost” to the taxpayers is money flowing from somewhere to somewhere else. Who benefits is more important than the ideology of the matter.

    • Check the history of this — As LBJ ramped up spending for Viet Nam, he spun out Fannie to get the mortgages off US books — which in 1964, look like a huge liability, but were fully secured by the properties. He was trying to hide the huge war deficit he was creating. Freddie was created after so there was competition (heh). The US mortgage market functioned perfectly well from 1935 to 2001.

      To follow the money — once the non bank lenders were allowed to abdicate lending standards, and feed no doc subprime mortgaes into Wall Street securitization machinery it all went to hell.

      Note that the GSEs were NOT allowed to underwrite subprime. But F&F lost so much market share to this, they petitioned OFHEO to let them into the market. Finally approved in late 2005/early 2006 just at the top! They were late to the party, and by the time theygot in, it was all over but the crying.

      • denim says:

        Thanks.
        My take on the issue was that those who were acting like risk insurers, but had between zero and inadequate liquid assets to cover the inevitable loss claims, were significantly responsible for the crash. Invoking the principle of fixing a problem at the root cause level, the government should have prevented any mortgage from defaulting at the single dwelling homeowner level for as long a time period that it would take for a fair settlement to be made. Succumbing to immediate “mark to market” valuation on a mortgage or house is somehow letting fear itself govern the country.

      • BennyProfane says:

        I have my suspicions that you, like so many Americans, have put most of your “forced savings” into real estate, and still expect the “government”, or, simply, the taxpayer to artificially support this market to infinity, or at least until you pass from this world. Because of that, we have this grotesquely mutated single home market, the largest in the world, that will be slowly shrinking over the next twenty or thirty years as our living standards inevitably drop and a shrinking tax and income base can no longer support such a folly. Did you read this?: http://www.nytimes.com/2013/08/29/business/economy/as-renters-move-in-and-neighborhoods-change-homeowners-grumble.html Just more evidence that the tide has gone out, ala Warren Buffet’s famous quote, and this is what we are left with, as the money changers attempt to pick through the bones and extract as much as they can.
        Your home price, and many others have been floated, but, at what cost? Sure, it’s American’s #1 asset, but, in the process, we are now living in the ruins of forty years of servitude to the financial industry and now going to crap. No jobs, trillions in debt, but, hey, my house is still worth five times more than the average American can afford to buy!

      • Angryman1 says:

        No jobs? Really? Everybody in my family is working, all my friends are working…….the “no jobs” myth is getting lol worthy. Lets face it, unless you are in economic boom(which the US only fully was in 3 years between mid-97-00 since mid-70′s) you will never be happy.

        Trillions worth of debt? Which we own ourself and we own a lot of foreign debt which negates part of it.

      • BennyProfane says:

        Angryman, I’ll bet you live in Greenwich and work in finance. Drive 50 miles west and north, and notice how everyone isn’t driving a very fresh German sedan. Shocking.

        btw, student debt alone is about a trillion. Start there.

      • Iamthe50percent says:

        Myth? My three grandsons are unemployed. My daughter is unemployed and I am only employed because of a Union no layoff clause, else they would throw my gray haired head out the window. There is no job problem only if you have connections.

      • Iamthe50percent says:

        Oh yes, and I was employed in the private sector as a free lance programmer and very happy for the entire eight years that Bill Clinton was President. So was my daughter.

      • Angryman1 says:

        Your grandsons are unemployed because of “choice” and leaching off of your family. They don’t want to work in low wage crap jobs and that is all there is to it. “unemployed” bs. Unemployment is a choice now. Outside 2009-10, there has always been a job. There are even more jobs now with some better paying. Some older people took to fast food for crying out loud.

        Listen, I fought this battle……..in 2002-3 and it doesn’t work. Tell your grandsons to find a job in a industry they may like working for and start from bottom up. That is just the way it is and has been now for its 2nd straight cycle.

        Heck, my brother was trapped in a Pet Store for 5 years, finally got a job in a trucking company that pays a lot more(though the hours are a bit annoying). The “no jobs” line needs to die. Instead we need the “bad paying” jobs line which is the whole issue.

      • NMR says:

        Barry; the way I remember it was when F/F got in during 2006 the admin and congress were desperate to keep air in the bubble as the private sector ran for the hills and pushed F/F into the breach…where they still are.

      • Not my recollection — it came from F&F due to marketshare losses to Bear, Lehman, Merrill, etc.

  3. clay says:

    I don’t know what their exact returns are, but I doubt anyone’s ridden the bond bull better than Hoisington Management. And, according to their latest outlook, it ain’t over yet. http://hoisingtonmgt.com/hoisington_economic_overview.html

    • Bam_Man says:

      The problem with riding the bond bull so well for long (like Lacy Hunt, Van Hoisington, Gary Schilling) is that people start referring to you as “a broken clock”. But I do agree that the secular low in bond yields for this cycle in US Treasuries has yet to be made.

  4. MayorQuimby says:

    PIMCO selling or moving capital doesn’t mean bond bull is over, it means PIMCO is selling or moving capital.

  5. neddyj says:

    Barry – I think you’re probably right, but is there a contrarian signal that comes from this as well? In my opinion, it’s unlikely that PIMCO is pushing into alternative investments at a good time. It’s been my experience that mutual fund companies can be more focused on ‘marketing’ than ‘investing’ – so pushing into a new asset class like this will likely stem the flows leaving PIMCO’s bond funds, but my guess is that they’re not offering a smart investment alternative at a smart time….

  6. larrr1 says:

    Hasn’t the money flowing back from Fannie/Freddie taken the net cost way below that figure and put it on track for a full recovery?

  7. [...] Barry Ritholtz from The Big Picture, “Proof the Bond Bull is Over: PIMCO Selling Hedge Funds” [...]

  8. [...] Proof the Bond Bull is Over: PIMCO Selling Hedge Funds (August 29th, 2013) [...]

  9. dvdpenn says:

    Watching Gundlach on CNBC’s Fast Money. Interesting comments on closed end bond funds and mortgage REITs as a source of yield (“There’s plenty of yield in the bond market. It’s just not in Treasuries.”) and emerging markets.

  10. Giovanni says:

    With the bull market in bonds now thirty years old it’s safe to say we’re closer to the end than the beginning and when your oil tanker of AUM is two trillion dollars long, changing directions is a process not an event.

  11. [...] Barry Ritholtz, “With their [Pimco's] foray into hedge funds, any suspicion you may have had that the bond bull market was in the 9th inning should be laid to rest.”  (Big Picture) [...]

  12. loebd says:

    Perhaps the WSJ writing about PIMCO’s foray spells doom for bond markets. It is not a new event, though. PIMCO currently manages $6bn across four hedge funds incepted b/w 9/04 and 7/11. It manages another $13bn across various lock up and hybrid funds, e.g. BRAVO, TALF, etc. Not sure what the news here is, perhaps that they are going retail.

    Also, the phrase “jumped the shark” jumped the shark quite a while ago. Thought I would let you know.

  13. [...] So how will investors react to the news? Well Barry Ritholtz gives us a clue: Barry said in a post on his popular blog The Big Picture. [...]

  14. Angryman1 says:

    You mean the low nominal bond prices this cycle, I agree. The government has underestimated the recovery and will have to revise down unemployment in the 4th quarter.

  15. Ned Baker says:

    Bonds are the most universally hated asset class at the moment. If I model the total return (as a naive lay investor) of a long term bond ladder/fund from say 1950-1980, I see the returns are better than T-bills. So is it possible bonds are fairly valued and can serve their historical role of safer investment, as long as you respect duration? Instead it seems everyone is running for the hills.

  16. [...] Barry Ritholtz, “With their [Pimco's] foray into hedge funds, any suspicion you may have had that the bond bull market was in the 9th inning should be laid to rest.”  (Big Picture) [...]

  17. [...] Proof the Bond Bull is Over: PIMCO Selling Hedge Funds | The Big … If you have been seeking unequivocal proof that the 30 year bull market for bonds is over, look no further than this WSJ headline: Bond-King Pimco Plans to Push.(more) [...]