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Gross and the bond market unconstrained

Exactly what former Pimco CIO, Bill Gross, does with his new unconstrained bond fund will be closely watched.

Putting it in context, Fund Calibre’s Darius McDermott, said the Neil Woodford’s departure from Invesco Perpetual paled in comparison to the departure of Gross. And, it is likely that the move has yet to be fully absorbed by the market.

Indeed, according to some reports, Morgan Stanley analysts estimated that the reaction of the Allianz share price (the firm that owns Pimco) implies sellers are discounting around $400bn in outflows from the fund manager. Of course none of this is certain, nor is it known where this money will go and, importantly, how much of it will follow Gross to his new home at Janus Capital. But, there is no doubt that the sheer scale of the numbers involved mean the bond market will be affected.

With hindsight, it is perhaps not that surprising that Gross decided to leave, given that the last year has been described by a few people as his very own Annus Horriblilis; a year characterised by significant redemptions, the departure of long time CEO Mohamed El Erian and some poor performance numbers.

But, more interesting, perhaps, than the reasons for his departure is the shape of his new fund at Janus Capital and whether or not he will be able to replicate the performance he achieved at Pimco (during a thirty year bull market for bonds) in a world where yields are unlikely to go much lower, but exactly when and how they will shift remains a very difficult question to answer. Particularly noteworthy is the fact that the new fund he will be running at Janus is unconstrained, because it follows what seems to be a growing trend within the sector.

Intellectually incoherent

According to from Nick Gartside, chief investment officer, fixed income, J.P. Morgan Asset Management, the shift to a more unconstrained approach has been a multi-year trend, driven primarily because of the intellectual incoherence of most bond indices.He explains that the more debt a country issues, the important it becomes within the index, thus effectively rewarding “misbehaving” countries.

“Since the mid-1980s there has been an explosion of debt. Far from deleveraging, the debt has instead shifted from private to public hands and over time there has been an increase of both duration and sector risk. This would be fine if yields were high, but they are not,” he says.

Olga Yangol – VP and senior emerging markets debt product specialist at HSBC Global Asset Management   agrees that an unconstrained approach is appropriate in the current environment.

“The difference between an unconstrained approach and a portfolio based on an index, is that instead of allocating based on issuer-focused construction (on the basis of who has issued the most debt), you are allocating based on expected returns, expected volatility and the correlations of the various issuers you are considering,” she said.

According to Gartside, the ability to shift irrespective of a benchmark allows managers to be nimble in adjusting sector and duration exposure in response to changing market conditions.

“These next generation unconstrained bond strategies are free to seek out the most attractive risk-adjusted return opportunities whilst maintaining the characteristics of a bond portfolio.

“Rising flows in recent years to this category would suggest investors believe they are likely better suited for today’s uncertain  bond investing landscape. This may be particularly relevant around the market’s next big test as it looks ahead to the first Fed funds rate increase,” he added.

Irrespective of the approach, Gross is likely to be able to more nimble in his new position than he was at the helm of the $221bn  he had under management in the Pimco Total Return fund, but exactly how nimble he becomes is going to be watched closely.

Part of the Mark Allen Group.