NEW YORK (MONEY Magazine) -
Bill Gross really doesn't want to be known as "the GE guy." But after criticizing General Electric's financial disclosure and level of short-term debt this past spring, Gross found himself splashed all over the news.
The bond king would rather be associated with agitating for better financial disclosure in general, but let's face it, how many investors have been willing to tangle with the company that Jack Welch built? Until recently, GE was a stock market sacred cow if ever there was one. And if any bond investor can get the attention of corporate America, it is Bill Gross.
Gross manages a staggering $280 billion. That's more than 1 percent of the world's debt. The fund manager has proved many times over that he's worth listening to. His $60.2 billion PIMCO Total Return Fund has beaten its benchmark, the Lehman Brothers aggregate bond index, for seven years, and done so without taking on excessive risk. With the stock market so volatile, are bond funds the place to be?
Read about Bill Gross' latest forecast for Dow 5,000 here
Gross thinks bonds will outperform stocks in many of the coming years, but that "the heyday for bonds, in terms of the price appreciation and lower yields that sort of mimicked the stock market over the past 20 years, is coming to an end."
That means bond investors should expect to earn the coupon, rather than earning the coupon plus capital gains. "Take the 4 to 5 percent yield on Treasuries, the 6 percent for mortgages, the 8 to 10 percent on corporate bonds, throw it into a salad bowl, toss it around, and you get a 6 percent or so return for bond investors," says Gross.
If you believe, as he does, that "the era of disinflation that characterized the '90s, in which inflation moved lower and lower and lower, is probably over," and that inflation will rise to 2 to 3 percent, that gives you a 3 percent real (inflation-adjusted) yield. "That's not so bad," he notes. "It's just not what we're used to."
Gross' advice in last year's Ultimate Investment Club issue proved the most profitable, but even the diviner of the debt markets has stumbled recently. Gross bemoans a move into corporate bonds that was "too early."
Since he began buying such bonds early in 2000, many of them have plunged in value. Dynegy, El Paso, Williams. "All mistakes," he groans.
The fund manager does expect to find opportunities in high-quality corporates over the next few months, however. Corporates have been hit relative to Treasuries and mortgages, and even the GE bonds of the world are trading down in price relative to where they were earlier this year.
Says Gross: "Bond investors don't really trust many corporations here, in terms of disclosure but also in a company's willingness to put bondholders at the table with stockholders."
That combination, he adds, has people "just tossing these things away." Funds similar to Pimco Corporate Income fund, a closed-end fund that trades on the New York Stock Exchange, are a good place to take a little risk for a yield of 7 to 8 percent, he says.
If corporate bonds seem too risky, Gross views the mortgage market as a fairly safe bet, although mortgages may be a little overvalued compared with high-grade corporates and international bonds.
He's cut mortgage holdings by 10 percent or so recently due to their strong showing. And junk bonds? "I am so afraid of junk," says Gross. "It's on another planet now because of all the new bonds that have come into the junk universe."
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Before the WorldCom bankruptcy, about 17 percent of the junk bond universe was made up of companies that had gone belly up in the prior year, says Gross. WorldCom's belly flop raises that percentage to more than 20 percent.
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