Bill Gross was once known as the bond king while he worked at Pacific Investment Management Company, LLC (PIMCO), which he co-founded. However, since leaving PIMCO in a high-profile and messy exit, Gross has not replicated his prior stellar performance with his new company, Janus Capital Group. The new mutual fund he manages at Janus has substantially lagged the performance of the Total Return Fund he managed while at PIMCO. Investors are waiting to see if the bond king can return his new mutual fund to the top of the bond fund world.

Gross's Background

Gross grew up in Ohio and graduated from Duke University with a degree in psychology. He served in the Navy in Vietnam. After his service in the Navy, he worked as an investment analyst with Pacific Mutual Life in Los Angeles. Gross founded PIMCO in 1971 with $12 million in initial assets. It had been previously a unit of Pacific Life Insurance.

Gross and the PIMCO Total Return Fund

Gross created the PIMCO Total Return Fund in 1987. He eventually built the Total Return Fund into the largest mutual fund in the world. His outspoken media style combined with his ability to communicate with investors led to the flow of money into the mutual fund.

Gross became well-known as one of the most important bond investors in the market. However, his performance began to suffer in 2011. He failed to see the continuing bullishness in bonds. He also failed to beat the benchmark index for the fund in that year. The fund had a strong year in 2012. However, his working relationships with colleagues at PIMCO were becoming strained. The fund had its worst year of performance in 2013, as the overall bond market suffered. The fund had returns of -1.92% versus a return of -2.02% for the benchmark Barclays U.S. Aggregate Index.

PIMCO's chief executive officer (CEO) and co-chief investment officer (CIO), Mohamed El-Erian, resigned in early 2014. Stories began to leak out into the financial media about the difficulty of working with Gross, highlighting specific clashes between El-Erian and Gross. In September 2014, Gross abruptly left PIMCO for Janus.

PIMCO Outflows

Investors began pulling their money from the Total Return Fund after Gross announced his exit. PIMCO rushed to install new portfolio managers and soothe investors as to the continued viability of the fund. This did little to stem the bleeding. The monthly outflows from the fund were enormous.

The Total Return Fund had a peak of $293 billion in assets under management (AUM) in April 2013. Investors began to pull their money from the fund as performance suffered from then on. The fund saw outflows of around $23 billion in September 2014 when Gross left PIMCO. The next month, the fund had outflows of over $25 billion. The fund had dropped to around $95 billion in assets as of October 2015. The last time the fund had less than $100 billion in assets was in 2007. Although investors pulled money from the Total Return Fund in eye-popping amounts, these assets did not follow Gross to Janus.

Janus Unconstrained Bond Fund

Gross now manages the Janus Unconstrained Bond Fund. The fund's purpose is to achieve long-term returns in diverse market environments. The fund invests across global fixed-income markets and is not constrained by benchmark-specific guidelines. The fund seeks to provide returns that are uncorrelated to traditional risk assets. This would hypothetically allow the fund to serve as an easy way for investors to diversify their portfolios. The fund's prospectus states that Gross is one of the foremost leaders as an investor in fixed-income markets.

The Janus Unconstrained Bond Fund first began trading in May 2014. The fund is down 2.56% since its inception, and it is also down 1.15% through December 2015 on the year. Commentary from the fund noted that it had attempted to sell volatility on the equity indexes using derivatives, including options and futures contracts in the third quarter of 2015. The volatility of the equity markets proved to be too much and resulted in losses for the fund. Selling volatility on equity indexes is a very high-risk strategy; this is not a normal strategy for a bond fund.

The fund has not performed very well so far. Morningstar ranks it at number 348 out of 477 funds in the nontraditional bond category. The fund has a low yield of 1.01%, which is not very attractive for a bond fund. Investors could obtain a better yield with index funds that track the stock indexes.

Further, the fund has failed to attract investors so far. The fund only had $1.32 billion in AUM as of December 2015, and around 50% of that money is believed to come from Gross himself. The fund also has a very high expense ratio of 1.01%. There are other bond index funds and actively managed funds that have much better performances with lower expense ratios.

In looking at the fund’s portfolio, the fund has an allocation of 53% of its assets U.S. Treasurys. This is followed by a 30% allocation to investment-grade bonds. The fund has an allocation of 14.6% to high-yield fixed income securities from the United States.

Total Return Fund Performance

By contrast, the Total Return Fund is slightly positive on the year at 0.89% through December 2015. The benchmark index is also up marginally at 0.88%. The fund is therefore barely beating its benchmark index. The fund has a much lower expense ratio of 0.46% compared to the Janus fund.

The fund has an allocation of over 30% to U.S. government bonds. This is followed by a 53% allocation to mortgage-backed securities (MBS). The fixed-income securities in the fund have an effective duration of 4.95 years with an effective maturity of 7.8 years. The fund has a low standard deviation of 3.66, which indicates that it has limited volatility. It also has a low Sharpe ratio of 0.35, which is appropriate for a low-volatility bond fund.

While the PIMCO Total Return Fund has not seen stellar performance since Gross left, it is substantially outperforming his new fund. Thus, in the long run, it may have made sense for Gross and PIMCO to part ways.

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