Bill Gross: Follow Ray Dalio’s Investing Strategy

Bill Gross, known on Wall Street as the bond king, said today that in managing his portfolios, he follows a strategy similar to that used by Bridgewater Associates’ Ray Dalio. Gross manages Janus Capital Group’s Global Unconstrained Bond Fund.

His strategy hasn’t been too popular recently, however, as some clients have pulled out their assets despite his positive performance.

Gross likes Dalio’s strategy

Gross made the remark in his most recent Investment Outlook report, Reuters reports (via Business Insider). Bridgewater is the biggest hedge fund firm in the world with approximately $169 billion in assets under management. Dalio is known for using leverage in an attempt to magnify the returns his equity, commodity and bond investments earn.

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Within the last year, unconstrained bond funds have increased in popularity, becoming one of the most favored vehicles for investment. The reason for this is because they’re very flexible and can invest in all of the different types of bonds anywhere in the world. Often such funds make investments into credit instead of assets that are sensitive to interest rates.

Bill Gross explains his strategy


In his report, Gross said “cheap leverage” works to generate alpha “as long as short rates stay low.” He also noted that investors who borrow short term credit to make riskier and longer investments, “the potential alpha necessarily demands choosing the correct assets to lever.” Further, the fund manager defined the challenge of his strategy as buying the right ones, specifically, those that will stay “artificially priced over one’s investment horizon.”

Additionally, the Janus portfolio manager said that currently corporate credit spreads are expensive because they’re too tight, although their duration is “more neutral” right now. He doesn’t see much that can be gained from corporate credit in the U.S., the U.K. and Europe, at least not until the world’s economy starts to move toward a recession.

Supporting U.S. Treasuries

Gross sees the best opportunity being related to under Mario Draghi’s quantitative easing program in Germany. The 18-month program buys about 200% of sovereign net new issuance. He said this should keep bond yields in Germany low, which in turn will provide an anchor for U.S. Treasury bonds and U.K. Gilts.

He said he wouldn’t buy those assets because they’re “clearly overvalued.” However, he would sell some of the volatility that surrounds them. The result is “much higher returns” if the 10-year Bund in Germany at 20 basis points “doesn’t move to -0.05% or up to 0.5% in the next three months.

Gross recommends being conservative right now and has promised returns of the magnitude he brought while at Pimco. He just recently took the reins of the fund at Janus and has yet to deliver on that promise.