Two guys who’ve been right on interest rates longer than probably anyone are Lacy Hunt and Van Hoisington of Hoisington Management. The scholarship and depth of their quarterly shareholder letters makes them worth reading. Their latest quarterly letter continues the theme of past letters. Interest rates are going to stay low and bonds will be good investments, because economic growth is slow, the velocity of money is slow, and there’s no indication these trends are likely to change.
The risk of outright deflation in Europe
with inflation at such low levels, and the danger
of similar developments in the U.S., should not
be minimized as inflation has fallen in almost
every previous U.S. and European economic
contraction. Lower inflation is, in fact, almost as
much of a hallmark of recessions as is decreasing
real GDP. From peak-to-trough the rate of CPI
inflation fell by an average of slightly more than
300 basis points in and around the mild U.S.
recessions of 1990-91 and 2000-01. Starting
from a much lower point, the CPI in Europe at
those same times dropped by an average of 150
basis points. Given that inflation is already so
minimal in both the U.S. and Europe, even the
mildest recession could put both economies in
Here’s a short, sweet essay on the case for using some annuities in your retirement portfolio along with a couple of ideas about how to use the annuities. It’s not new to Retirement Watch readers, but it’s a good, concise briefing.
For years, many economists have recommended that workers use all their retirement savings to buy life annuities in order to avoid outliving their savings. Nevertheless, few workers want to put their whole retirement nest egg into a life annuity.
Why? In one word, optionality. Retired workers want to have substantial resources available to deal with medical emergencies or unexpected disasters during their retirement years. Alternatively, retired workers want to bequeath any remaining savings at death to their families, friends and favorite charities. However, if workers buy a life annuity, all payments typically end at death — even if it occurs shortly after retirement.
He’s moved from PIMCO to Janus, but Bill Gross still is fairly pessimistic about investment returns in coming years. In his latest investment commentary, the first at Janus, as in his previous commentaries at PIMCO, Gross says we’re in a different financial era. The credit-expanding, asset-inflating era that began in the late 1970s or early 1980s is behind us. Now, we have a hangover and are recovering. The recovery will last quite a while, he says. He also includes an introductory note briefly explaining his move from PIMCO to Janus.
Let me address the most obvious question first: Why did I leave PIMCO? Had there been a reasonable way to continue there, I would have stayed to my last breath. I was honored by the trust of the millions of clients and thousands of employees over decades. They have been the center of my life’s work. I am very proud of my record there for more than 40 years. PIMCO is a great firm with lots of great people, and Allianz was a fine owner for many years. But slowly and with great hesitation, I came to understand that it was time for me to leave. It happens sometimes to founders! But that is water under the bridge, as they say. I don’t plan to address it further. Now let’s talk about the future.
Bill Gross, formerly of PIMCO, isn’t moving quietly to his new spot at Janus. He gave an interview to Barron’s that was published over the weekend in which he said that he was happy to be focused primarily on investing instead of all the other tasks that come along with running a major firm. That is consistent with my recent conclusion that Gross was spread to thin at PIMCO. You can read a summary of the interview here.
Then, Jeffrey Gundlach of rival DoubleLine funds gave an interview with Reuters in which he gave more details about his meeting with Gross shortly before his decision to join Janus. It seems clear Gross knew that he was going to be fired at PIMCO and wanted to leave of his own accord.
Gundlach said that Gross called him out of the blue.
“Bill called through the DoubleLine switchboard,” said Gundlach.
Skeptical that it was really Gross, Gundlach said he “told the receptionist to take a number and then call it to verify it was not some prankster. A couple of hours later I called Bill from home.”
In that initial phone conversation, Gundlach said: “Bill came out and told me: ‘Pimco doesn’t want me anymore.’ And I said, ‘That is an unbelievably stupid decision.”’
Jeffrey Gundlach of DoubleLine Funds doesn’t like the Morningstar rating service, and they let that show in their ratings of Gundlach’s fund. This article gives the details. (Subscription might be required.) Briefly, Gundlach started to believe that the Morningstar raters didn’t understand his fund and its strategy. He was critical of them publicly and eventually stopped cooperating with Morningstar. An interesting detail in the story is that Gundlach’s rivals at his old firm apparently met with the Morningstar rater a few years ago and gave him some private information that influenced his view of Gundlach.
GUNDLACH’S BITTERNESS towards Morningstar goes back to Dec. 4, 2009, when he lost a power struggle at TCW and was fired. Almost immediately, Jacobson came out with a lengthy report gushing over TCW’s “savvy move” in agreeing at the same time to buy the L.A. bond manager Metropolitan West Asset Management to take over Gundlach’s duties.
Unknown to Gundlach, that same month Morningstar engineered a revote of its Bond Manager of the Year for 2009 after Gundlach won on the first ballot. Loomis Sayles’ Daniel Fuss won on the second ballot after Jacobson, via teleconference from his Kansas City home, hinted to voters that Gundlach and his new start-up DoubleLine were going to be hit by some bad news, according to two people on the conference.
A number of articles discuss the details about Bill Gross leaving PIMCO and taking over a very small fund at Janus. This brief piece puts the move in context. My view is that Gross was too stretched trying to maintain his day to day portfolio management of an ever-growing amount of assets plus trying to manage PIMCO. Like many people who built businesses, he didn’t want to step back, share, and admit his mortality. It’s probably best for PIMCO that Gross is moving on. He built a fine organization, and many strategies and funds at PIMCO were doing quite well without much input from him. Unfortunately, he didn’t manage his exit and leave with dignity.
Yet traders may be overestimating the effect of Gross’ move on both companies. At Pimco, the peculiarities of the 70-year-old Gross’ personal management style were beginning to overshadow his storied success as an investment manager. This was exposed by his widely remarked squabbling with Mohamed El-Erian, the economist who served as co-chief executive and co-chief investment officer with Gross and was once regarded as the latter’s heir-presumptive. El-Erian left Pimco earlier this year.
In the wake of El-Erian’s departure, stories leaked out about Gross’ imperious behavior–traders were forbidden to speak to him or even make eye contact on the trading floor, the Wall Street Journal reported. He brooked no discussion or debate about his trading strategies and became hostile to rising talents on the floor.
The effects of Mohammed El-Erian’s abrupt departure from PIMCO in January continue, and continue to make news. In his first public words on the departure and the crisis it engendered for PIMCO, El-Erian told Reuters that he didn’t anticipate all the media attention that followed and would have done things differently if he had an idea what would follow. He also said that the real reason he left PIMCO was so that he would be able to spend more time with his daughter.
In other PIMCO news, the firm confirmed that the head of its emerging market equities, based on London, left the firm two weeks ago. No details were given for the departure, but it appears that after some recent hires in that section of PIMCO either there wasn’t room for the departed employee or there were conflicts.
To begin with, he might have considered working part time.
“Was there a way of not going 100 miles an hour and maybe going 50 miles an hour? To be perfectly honest, I didn’t explore that option. I never explored it,” he said, describing his management style as trying to work as hard or harder than anyone else. A part-time position would have felt “inconsistent” with his style, he said.
El-Erian’s departure rocked the investment world, where he was seen as the successor to “Bond King” Gross. Questions arose about the relationship between the two, and plans at Pimco, a unit of German financial services giant Allianz SE (ALVG.DE).
Journalist Evan Simonoff recently attended a conference on global retirement issues and wrote a summary of the discussions. The aging population creates an increased need for a reliable income stream. Much of the conference focused on how individuals can create that income stream and, in particular, annuities versus investing lump sums. It’s a good, balanced discussion that each of you would benefit from reading.
Merton then took over and focused on the world most of us are familiar with—the DC, 401(k) space. It’s the future, and Merton worries the vast majority of participants are focused on the wrong number as they fix their attention on a dollar amount when they should be looking at an income stream.
The upshot, according to Merton, is that almost everybody in a defined contribution plan faces an asset/liability mismatch and many are clueless about how to grapple with it. A deferred annuity involves taking high risk in terms of one’s wealth, and that’s a key reason it’s not popular. However, Merton said that it also entails lower risk in terms of income.
Over the next decade, millions of Americans are going to be forced to face a dilemma about income preservation versus wealth preservation. If interest rates remain low, payouts from annuities will stay at 60% or 70% of what an annuitant could receive in a normal interest-rate world.
Perhaps it is just a coincidence, but this study by Bloomberg.com found that the new rules recently implemented for money market funds might increase demand for U.S. Treasury bills, making it easier for the government to fund its deficit and keeping short-term rates low. For institutional investors, money fund balances won’t be fixed at $1. Instead, the net asset value can fluctuate with the value of the underlying securities, and there could be paper losses. To avoid the losses, some institutional investors are switching to U.S. Government short-term money market funds. That will minimize fluctuations and potential deviations from $1 per share values.
During the past five years, America has enjoyed some of the lowest financing costs in its history as the Fed held its benchmark rate close to zero and bought trillions of dollars in bonds to restore demand after the credit crisis.
Based on prevailing Treasury bill rates, it costs the U.S. just 0.02 percent to borrow for three months as of 9:45 a.m. today in London. In the five decades prior to 2008, the average was more than 5 percent.
Now, with traders pricing in a 58 percent chance the Fed will raise its overnight rate by July, speculation is building that borrowing costs are bound to increase. That’s made finding buyers for the nation’s debt securities even more important.
The sweeping rule changes in the money-market fund industry may help provide that demand. Since 1983, money-market funds have been permitted to keep share prices at $1, meaning a dollar invested can always be redeemed for a dollar.
After years of study and discussion, the SEC finally issued new rules on money market funds. The new rules process began after 2008. The SEC had allowed money market funds to maintain net asset values of $1 per share, even when there actually were fluctuations in their portfolios and on any give day the fund’s portfolio might be worth more or less than $1. After the Lehman Brothers bankruptcy a number of money fund suffered permanent losses of capital, and their net asset values definitely were less than $1 per share. Many fund sponsors shored up their funds to maintain the $1 NAV. But the Reserve Funds suffered substantial losses and weren’t able or didn’t want to add additional capital. The funds were liquidated at a loss to shareholders.
The SEC initially wanted to do away with the $1 NAV fiction. The industry and investors didn’t like that. For most of us, the rules won’t change. Money funds still will retain the $1 NAV fiction except in a few cases. But what will change for a lot of people is that in times of stress a money market fund will be able to stop redemptions. This takes away the idea that money market funds are just like checking accounts with higher interest.
The rules approved on Wednesday aim to prevent any future runs through a combination of measures. In one important change, certain money market funds will have to report a floating net asset value instead of a fixed value of $1 a share. This change is meant to remind investors that the funds are not without risk and that their value can decline periodically.
But not all funds will be covered by that rule. Only funds whose investors are institutions and that purchase corporate debt or municipal securities are covered. Funds whose investors are individuals are not subject to the change.
In addition, the S.E.C. adopted rules that give funds the ability to stem investor redemptions during times of stress. Money market funds, in these situations, will be able to impose fees and delays that temporarily prevent investors from taking out their cash.