Bill Gross The Second Coming

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The Second Coming

William H. Gross


Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;

— William Butler Yeats, 1919

Almost permanently affixed on the whiteboard of PIMCO’s Investment Committee boardroom is a series of concentric circles, resembling the rings of agiant redwood, although in this case exhibiting an expanding continuum of asset classes with the safest in the center and the riskiest on the outer circles. Safest in the core are Treasury bills and overnight repo, which then turn outwards towards riskier notes and bonds, and then again into credit space with corporate, high yield, commodities and equities amongst others on the extremities. The intent of the image is to constantly remind us as investors that higher returns are correlated with greater risk, and that portfolios that seek to maximize beta usually do so with increasing volatility and potential loss of principal. Conversely, investors who are risk-averse and move towards the safety of the center, sacrifice expected and in most cases historical returns in the process.

Yet there is more to our concentric circles of asset classes than meets the eye. If its only message were that risk and return were correlated, then we could simply write that on the whiteboard and be done with it. Instead, our visual schematic expresses a more complicated process of cause and effect that allows an investor to anticipate price changes instead of simply describing ex post returns and volatility. It provides the foundation for alpha generation, as opposed to simple beta summation, and therefore the potential to beat the market and outperform competitors.

This conceptual “cause and effect” is what brings life to our concentric circles – it is what allows us – if done properly – to make profitable choices between asset classes at the appropriate time; it is the heart of our active management process and our YGIA “Your Global Investment Authority” platform. Stated perhaps too simply, the primary “cause” is central bank monetary policy. The “effect” is an expanding or contracting array of asset prices that are dependent upon it. Change the price of credit at the center and you change the price of assets at the outer extremities. Simple really, although the timing and yield of price at the center is no easy matter as Yellen, Carney, Draghi and Kuroda would be the first to admit.

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