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The forward below is a profile of Bill Gross thoughts. Why would
anyone expect anything different from this Bond guy?
John
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Subject: Fortune.com Retirement 2002
Date: 09/06/2002 01:30pm
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Subject: Fortune.com Retirement 2002
From: jcappello1@xxxxxxxxxxx
Date: 09/06/2002 01:30pm
Fortune.com: Retirement 2002
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RETIREMENT GUIDE 2002
Bill Gross
(Photo: Evan Kafka)
STOCKS OR BONDS
· Bill Miller: Sultan of Stock
· Bill Gross: Bond King
Protect Your Dreams
Best-Laid Plans
FORTUNE 40
Stocks vs. Bonds
Real Estate: Invest Where You Sleep?
Pension Funds' Seamy Side
Retirement Guide
Stocks or Bonds? Bill vs. Bill
Can bonds beat stocks for a third year in a row? Two legendary fund managers offer answers--and surprising views on the state of the markets.
FORTUNE
Monday, August 12, 2002
By David Rynecki
Bill Gross: The Bond King
Gross manages Pimco's Total Return bond fund, which boasts a ten-year average gain of 8.3%.
FORTUNE: Can bonds beat stocks for a third year in a row?
GROSS: Oh, yes. You know, there have been other periods when that happened. To my way of thinking we are definitely in one of those periods in which over a number of years--and it doesn't have to be a three-peat or a four-peat, it can be five out of six or six out of nine--bonds should do better than stocks. I can tell you high-quality bonds will only give you 4%, 5%, and 6% returns over the next few years. We continue to like the mortgage market. It's a safe haven. It provides yields of 6% with triple-A quality. We've also moved selectively into the corporate market over the past few months. And there are even some good plays in the emerging-markets sector, such as Mexico, that should benefit from a mild global recovery and should boost total returns.
FORTUNE: What's your take on the stock market?
GROSS: Obviously, the euphoria is turning into despair. To the extent that investors are afraid of their shadows as well as CEOs and other goblins in the night, there is a positive for stocks. But as that is happening, there's a problem that no one is talking about. And that's that all the corporate pension funds that have benefited in the past few years simply because stocks had done well didn't need to put money into their own funds. Now, as stocks sink, there will be a need for companies to put money into their pension funds, and that will hurt earnings. It's a huge negative. That's why I think over the next five years bonds will probably outperform stocks by a few percentage points, but both will return much less than double digits.
FORTUNE: So should we be buying bonds?
GROSS: Buying a bond is to a considerable extent buying a safe haven. When the storm is brewing, bonds are relatively stable in terms of their value. Now, examples such as WorldCom are disproving that, but the high-yield and the corporate-bond markets have always been sort of volatile. High-quality bonds are anchors that let investors sleep better than they would if they were holding only stocks. The current market only proves that in spades.
FORTUNE: You're known for having a keen eye when it comes to the economy. What are you seeing?
GROSS: We've got an economic recovery. We had a 6% first quarter for GDP. We're probably going to have 3% in the second and third quarter. It's just that when you look at the Dow and the Nasdaq every night, you figure we've got to be in a depression. Well, we're not. The economy is improving and earnings are recovering. The problem for a lot of investors is that the prices of stocks were so high that they're still in the process of adjusting toward the new world reality of 2002. The new reality is one in which there is more risk from the standpoint of simple security (I'm talking about Sept. 11 and the potential for another event). Plus there's risk from the process of globalization that was the foundation of the 1990s. Companies are wondering whether or not they should be expanding as opposed to hunkering down or pulling back. The budget is going from a surplus to a relatively large deficit, and we face obvious problems in terms of accounting and credibility on top of a weakening dollar. All that could have implications for foreign institutions that own lots of dollars and lots of U.S. securities.
FORTUNE: That sounds bleak. Is there opportunity in disaster?
GROSS: At some point. But when do we step in? We did buy some telecom bonds. We didn't buy WorldCom, thank goodness. We have bought other telecom bonds like Sprint, AT&T, and AT&T Wireless that haven't done very well either. It's not like these are triple-A companies, but they are survivors, and they're earning their yields of 10%. We've been a little premature entering the telecom market. If we hadn't, we'd be kicking the competitors by that much more.
FORTUNE: How much of a problem is the lack of corporate credibility?
GROSS: Huge. We have to determine who we can trust and what numbers we can trust, because we rely on 10-Ks and 10-Qs and Arthur Andersen opinions as well. Hopefully, we have a different slant. But the numbers are the numbers, and if you can't trust the numbers it becomes very difficult for Pimco.
FORTUNE: So what are you doing about that?
GROSS: All lenders have a sacred trust. If lenders can't trust companies, then the game of money exchange is over. So we have a huge responsibility to investigate and to speak out. What I tried to do with General Electric [in March, Gross rebuked GE for carrying excessive short-term debt and for lack of financial disclosure] was not to pillory the company but to use them as an example and to suggest that, hey, if the pinnacle of American corporations is playing tricks and games with income statements and balance sheets and is relying too much on short-term debt, then perhaps much of the rest of corporate America is doing the same. I wanted to keep the ball rolling in terms of this need for corporate disclosure and this need to straighten up, to become more conservative, more ethical, and more reasonable in terms of the investment and lending process.
FORTUNE: What portion should bonds occupy in investors' portfolios?
GROSS: It all depends on age and what the money is needed for. An old maxim says that if you hold onto stocks for 30 years you can't go wrong. I agree ... the riskier asset should return more. But it usually takes longer periods of time for that maxim to be proven. In the late 1990s investors went too far with the belief that only stocks would provide a nest egg for their retirement years. That illusion allowed investors to fill up their 401(k)s with portfolios of 100% stocks. That was never justified because of exactly what we've seen over the past few years. Things can go wrong. Things can change. Because of that you need to be diversified. The older you are, the more bonds you need, and the younger you are, the fewer you need. But any age group needs a relatively healthy dose of bonds [Gross declined to give specific percentages] if only to allow the investor to sleep at night and to survive shorter periods--namely two years, five years, ten years--of underperformance. Many of these investors are not only saving for retirement but have college for their kids to keep in mind and other shorter-term goals.
FORTUNE: What should an individual investor be doing?
GROSS: Investors need to diversify. The key will be safe, stable, and secure streams of income. I would emphasize high-quality corporate bonds as well as mortgages and stocks with relatively high dividends. Treasury yields are too low, and I wouldn't be a buyer right now.
FORTUNE: What's your bottom line?
GROSS: The next six to 12 months are going to be stinkers for most stocks and for high-risk bonds that depend on hope.
Or will stocks beat bonds? See Bill Miller: The Sultan of Stock.
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RETIREMENT
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Bill Gross(Photo: Evan
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STOCKS OR
BONDS· <A class=ValideaLink
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Miller: Sultan of Stock · Bill Gross: Bond
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Stocks or Bonds? Bill vs. Bill
Can bonds beat stocks for a third
year in a row? Two legendary fund managers offer answers--and
surprising views on the state of the markets.
FORTUNEMonday, August 12, 2002By
David Rynecki
Bill
Gross: The Bond KingGross manages Pimco's
Total Return bond fund, which boasts a ten-year average gain
of 8.3%.<SPAN
class=RedSubHead>FORTUNE: Can bonds beat
stocks for a third year in a row? <SPAN
class=RedSubHead>GROSS: Oh, yes. You know,
there have been other periods when that happened. To my way of
thinking we are definitely in one of those periods in which
over a number of years--and it doesn't have to be a three-peat
or a four-peat, it can be five out of six or six out of
nine--bonds should do better than stocks. I can tell you
high-quality bonds will only give you 4%, 5%, and 6% returns
over the next few years. We continue to like the mortgage
market. It's a safe haven. It provides yields of 6% with
triple-A quality. We've also moved selectively into the
corporate market over the past few months. And there are even
some good plays in the emerging-markets sector, such as
Mexico, that should benefit from a mild global recovery and
should boost total returns.
FORTUNE:
What's your take on the stock market? <SPAN
class=RedSubHead>GROSS: Obviously, the
euphoria is turning into despair. To the extent that investors
are afraid of their shadows as well as CEOs and other goblins
in the night, there is a positive for stocks. But as that is
happening, there's a problem that no one is talking about. And
that's that all the corporate pension funds that have
benefited in the past few years simply because stocks had done
well didn't need to put money into their own funds. Now, as
stocks sink, there will be a need for companies to put money
into their pension funds, and that will hurt earnings. It's a
huge negative. That's why I think over the next five years
bonds will probably outperform stocks by a few percentage
points, but both will return much less than double digits.
<IMG height=279 alt="Bonds Beats Stocks Chart" hspace=5
src="http://www.fortune.com/images/magazine/2002/20020812/bil08_gross_chart211x279.gif";
width=211 align=left vspace=1 border=0><SPAN
class=RedSubHead>FORTUNE: So should we be
buying bonds? <SPAN
class=RedSubHead>GROSS: Buying a bond is to a
considerable extent buying a safe haven. When the storm is
brewing, bonds are relatively stable in terms of their value.
Now, examples such as WorldCom are disproving that, but the
high-yield and the corporate-bond markets have always been
sort of volatile. High-quality bonds are anchors that let
investors sleep better than they would if they were holding
only stocks. The current market only proves that in spades.
FORTUNE:
You're known for having a keen eye when it comes to the
economy. What are you seeing? <SPAN
class=RedSubHead>GROSS: We've got an economic
recovery. We had a 6% first quarter for GDP. We're probably
going to have 3% in the second and third quarter. It's just
that when you look at the Dow and the Nasdaq every night, you
figure we've got to be in a depression. Well, we're not. The
economy is improving and earnings are recovering. The problem
for a lot of investors is that the prices of stocks were so
high that they're still in the process of adjusting toward the
new world reality of 2002. The new reality is one in which
there is more risk from the standpoint of simple security (I'm
talking about Sept. 11 and the potential for another event).
Plus there's risk from the process of globalization that was
the foundation of the 1990s. Companies are wondering whether
or not they should be expanding as opposed to hunkering down
or pulling back. The budget is going from a surplus to a
relatively large deficit, and we face obvious problems in
terms of accounting and credibility on top of a weakening
dollar. All that could have implications for foreign
institutions that own lots of dollars and lots of U.S.
securities.
FORTUNE:
That sounds bleak. Is there opportunity in disaster?
GROSS: At
some point. But when do we step in? We did buy some telecom
bonds. We didn't buy WorldCom, thank goodness. We have bought
other telecom bonds like Sprint, AT&T, and AT&T
Wireless that haven't done very well either. It's not like
these are triple-A companies, but they are survivors, and
they're earning their yields of 10%. We've been a little
premature entering the telecom market. If we hadn't, we'd be
kicking the competitors by that much more.
FORTUNE: How
much of a problem is the lack of corporate credibility?
GROSS:
Huge. We have to determine who we can trust and what numbers
we can trust, because we rely on 10-Ks and 10-Qs and Arthur
Andersen opinions as well. Hopefully, we have a different
slant. But the numbers are the numbers, and if you can't trust
the numbers it becomes very difficult for Pimco.
FORTUNE: So
what are you doing about that? <SPAN
class=RedSubHead>GROSS: All lenders have a
sacred trust. If lenders can't trust companies, then the game
of money exchange is over. So we have a huge responsibility to
investigate and to speak out. What I tried to do with General
Electric [in March, Gross rebuked GE for carrying excessive
short-term debt and for lack of financial disclosure] was not
to pillory the company but to use them as an example and to
suggest that, hey, if the pinnacle of American corporations is
playing tricks and games with income statements and balance
sheets and is relying too much on short-term debt, then
perhaps much of the rest of corporate America is doing the
same. I wanted to keep the ball rolling in terms of this need
for corporate disclosure and this need to straighten up, to
become more conservative, more ethical, and more reasonable in
terms of the investment and lending process.
FORTUNE:
What portion should bonds occupy in investors' portfolios?
GROSS: It
all depends on age and what the money is needed for. An old
maxim says that if you hold onto stocks for 30 years you can't
go wrong. I agree ... the riskier asset should return more.
But it usually takes longer periods of time for that maxim to
be proven. In the late 1990s investors went too far with the
belief that only stocks would provide a nest egg for their
retirement years. That illusion allowed investors to fill up
their 401(k)s with portfolios of 100% stocks. That was never
justified because of exactly what we've seen over the past few
years. Things can go wrong. Things can change. Because of that
you need to be diversified. The older you are, the more bonds
you need, and the younger you are, the fewer you need. But any
age group needs a relatively healthy dose of bonds [Gross
declined to give specific percentages] if only to allow the
investor to sleep at night and to survive shorter
periods--namely two years, five years, ten years--of
underperformance. Many of these investors are not only saving
for retirement but have college for their kids to keep in mind
and other shorter-term goals.
FORTUNE:
What should an individual investor be doing? <SPAN
class=RedSubHead>GROSS: Investors need to
diversify. The key will be safe, stable, and secure streams of
income. I would emphasize high-quality corporate bonds as well
as mortgages and stocks with relatively high dividends.
Treasury yields are too low, and I wouldn't be a buyer right
now.
FORTUNE:
What's your bottom line? <SPAN
class=RedSubHead>GROSS: The next six to 12
months are going to be stinkers for most stocks and for
high-risk bonds that depend on hope.
Or will stocks beat bonds? See <A
href="http://www.fortune.com/sitelets/retirement2002/bill_miller.html";>Bill Miller:
The Sultan of Stock.
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