Pimco’s Gross: Age of Double-Digit Returns Is Gone, Inflation Looms

Wednesday, 05 Sep 2012 11:02 AM

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Investors need to choose a portfolio that carries the lowest fees possible, as the days of double-digit returns are over and a new era of inflation is dawning, said Bill Gross, founder of Pimco, manager of the world’s largest bond fund.

Individual investors should balance their asset mixes according to their ages, with younger investors owning more stocks and older investors going heavier in bonds.

“If you choose an investment adviser, a mutual fund or an [exchange-traded fund], make sure that your fees are minimized," Gross wrote in his September Investment Outlook. "After all, if overall returns average 3 to 4 percent annually, how can you possibly afford to give 100 basis points of it back? You cannot,” wrote Gross, whose Pacific Investment Management Co. had $1.82 trillion in assets as of June 30.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

“And be careful," wrote Gross, also co-chief investment officer of Pimco. "The age of credit expansion, which led to double-digit portfolio returns, is over. The age of inflation is upon us, which typically provides a headwind, not a tailwind, to securities price — both stocks and bonds.”

Institutional investors, meanwhile, should prepare for lower returns and should not assume either industrial or emerging-market countries will grow and provide the hefty returns they used to.

“If you are an institution be cognizant … that higher returns — from both stocks and bonds — usually emanate in countries and economies which exhibit higher growth,” Gross said.

“And don’t trust any country, including the United States, to forever remain a clean dirty shirt. There’s mud aplenty in our future … .”

The Federal Reserve and other central banks may be "to blame" for the "current shipwreck," wrote Gross, who runs the world's largest bond fund, the Pimco Total Return Fund, which has $272.5 billion in assets as of August 31 and attracted about $1.29 billion in inflows last month, according to Morningstar.

He said their plans to inject liquidity into the financial system have backfired.

Meanwhile, some heavyweight investors are a little more optimistic, at least on equities, including Laszlo Birinyi, president of Birinyi Associates Inc., who sees the Standard & Poor’s 500 Index rallying to 1,500 by the end of the year, up from around 1,400 today based on historical research.

“If this market continues to track history — and to date nothing has been a better guide — we could see 1,500 before year-end,” wrote Birinyi, who advised clients to buy equities before they bottomed in March 2009, Bloomberg reported.

“We like the market in part because it is a bull market. The day-to-day commentary is all good and fine for information, but the reality is that in a bull market stocks go up.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation


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