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Karen Gibbs
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Being Bill Gross


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You might remember the saying "Do as I say, not as I do." That was a favorite proverb of my parents' generation, one that I never really quite understood.

I've always preferred "Lead by example" and it is advice that has served me well. When looking for a personal trainer, I lean toward the fittest of the bunch. When looking for a fashion consultant, I gravitate toward the one I think is the best dressed.

And when listening to advice from money mangers, I ask them where they're putting their money. For example, Steve Leuthold of the Leuthold Group has always believed in putting his money where he advises his clients to invest. It lends credence to his recommendations and avoids the conflict of interest scandals that were so evident in the investment banking and analyst relationships revealed in recent years.

That interest in professional investors who back up their advice with their wallets had me particularly interested in reading two opinion pieces recently penned by Bill Gross, in the January 13 edition of the Washington Post and the Jan.16 edition of the Wall Street Journal. As the very successful founder and manager of Pacific Investment Management Company, more commonly known as Pimco, Gross oversees $350 billion in bonds and other assets, and is considered one of the most astute fixed income investors of his generation.

Yet the man who made his reputation as a U.S. bond guru now says he's pulling it out of his extremely successful PIMCO Total Return Bond Fund and parking it in commodities and tangible assets, foreign currencies and stocks, real estate, Treasury Inflation-Protected Securities, and global and municipal bonds.

What's behind this move? The very real possibility of higher interest rates.

Interest rates and bonds move in opposite directions, because higher rates cut into fixed income returns, and vice versa. With that dynamic in mind, investors in recent years drove up bond prices as the Federal Reserve cut interest rates and the stock markets came down from their late '90s bubble.

But U.S. interest rates now are just about as low as they can go, and they're bound to rise at some point if the robust economic growth of the past several quarters continues. And probably no investor has a more vested interest in, well, interest than Gross, since bonds are the main investment vehicle of his Total Return Fund, the world's largest bond mutual fund with $74 billion.

If history is any guide, Pimco Total Return will continue to outperform its peers, but if Gross is right, it will lag other asset classes. He believes that bonds could face a tough time for years, thanks to big deficits and rising inflation, which explains his move into other assets/alternatives not open to his flagship funds.

He's not abandoning the bond market altogether, but by investing in TIPs he's taking advantage of the protection offered by these special types of treasury securities whose ultimate value cannot be diminished by inflation. Like other treasuries, TIPS pay a fixed rate of interest on the inflation-adjusted principal, so if inflation occurs throughout the life of your security, every interest payment will be greater than the previous one. At maturity the government will redeem the security at its inflation-adjusted principal amount or its original par value, whichever is greater.

Gross also has an interesting take on municipal bonds. Many state and local governments are forbidden by law to run deficits, and to balance their budgets they're currently issuing bonds instead of raising taxes. More bond offerings should mean lower prices -- but as interest rates rise, local municipalities tend to reduce their new bonds, and that drop in supply helps soften the drop in muni bond prices. And the interest paid on most public purpose municipal bonds is exempt from federal taxes as well as taxes of the issuing entity's state, boosting the net return further.

Foreign investments appear in Gross' current allocations because of his concern over the falling dollar. While a falling dollar helps U.S. exporters in the near term by making their goods more competitive, in the long run it means we must shell out more dollars for the same amount of goods - in other words, a falling dollar eventually leads to inflation. Meanwhile, stronger foreign currencies are great for foreign stocks and bonds, increasing their value relative to the dollar.

Finally, let's look at the potential of commodity investing. Some of you may remember my interview last May with "adventure capitalist" Jim Rogers, who touched on some of the same fears that Gross is alluding to, especially the overleveraging of our nation. And in my conversation with international investor Marc Faber in November, the subject of commodity investing also arose. Faber also suggested investing in tangibles - things you can touch. He recommended looking at futures markets: Coffee, sugar, rubber, wheat, and even corn. To take advantage of those economies and companies that will benefit from this expected rise in inflation and prices.

You may not have paid any attention to Jim Rogers. You might not have known Marc Faber's investment track record. But when someone with the clout of Bill Gross is telling you what he's doing with his money, it might do your portfolio a world of good to think it.

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