Dispensing Advice

The Last Guru

bill gross-bloomberg-CHANGED
Heading off into the sunset.
  • Why it matters

    Why it matters

    The increasing reliance on teams of researchers, analysts and programmers for investment advice could change the fabric of retail investing.

  • Facts

    Facts

    • Clients withdrew about $10 billion from Pimco after Bill Gross’s departure last week.
    • His “magic investment formula” is now common knowledge among fund managers.
    • Technology, and technical analysis, is eroding the influence of star investors such as Mr. Gross.
  • Audio

    Audio

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Bill Gross exits Pimco and the stock of its owner, Allianz, Europe’s largest insurance company, collapses as investors pull billions from the global investment management firm. It is rare that a high-profile investor – even one with a personal fortune estimated at €1.85 billion ($2 billion) – causes so much tumult with their departure.

Now Pimco is doing everything possible to ensure more customers don’t follow Mr. Gross out the door.

Yet when the initial excitement subsides, the future prospects for the company are bright, since sober-minded investors know the era of the big name star performer has passed.

When Mr. Gross founded Pimco in the early 1970s, he invented a totally new way to invest – via the active management of interest-bearing securities, such as bonds or loans. He made what had been considered a simple form of investment into a “secret science” based on an exact analysis of interest structures.

When the initial excitement subsides, the future prospects for the company are bright.

And because interest levels in the capital markets have generally dropped over the past few decades, he was able to generate billions in extra profits compared to conventional investment strategies, largely because falling interest rates meant rising values for debt and equity securities.

A number of things have changed since those heady days.

For one thing, interest rates are no longer falling. In the U.S., there has already been an upward turn, making investments in the bond market more difficult even as stocks suffer under rising interest rates.

Second, the “secret science” Mr. Gross developed some 40 years ago is now common knowledge to a new generation of fund managers who can rely on computers to help them analyze markets.

Third, major investors, in particular, are paying close attention to operating costs and are preferring cheap, passively managed funds wherever possible. They’re often attaching more importance to finding a risk-reward profile that closely suits their needs. In short, the belief in geniuses who can beat the market has given way to sober analysis.

The “secret science” Mr. Gross developed some 40 years ago is now common knowledge for a new generation of fund managers.

Trends are also turning against the star investors. It’s becoming easier to automate even the most sophisticated strategies and integrate them, as needed, into an investment strategy as an inexpensive module. Rationality is the byword in this new world of investors, with very little room for the flashy, high profile investor.

Mr. Gross’ departure from Pimco is an example of this new sober approach. A funds company once dominated by a single star has evolved into a firm with a team-oriented structure. At a time when financial investment is becoming increasingly more complicated and passive funds and computers threaten to make active fund managers superfluous, it is particularly important to bundle knowledge and experience into teams.

It no longer makes sense to rely on the instincts of a single guru, who may sometimes simply be lucky, or whose instincts work only in certain phases of the capital markets.

We will still continue to hear about hedge funds that have reaped billions through enormous risk-taking, but the time when the investment gurus ruled the scene is probably past.

The development is similar to that experienced in the world of science at the beginning of the 20th century, where brilliant researchers working in tiny laboratories made earth-shattering discoveries. There are still Nobel Prizes for scientists, but today, research is a highly technical and collaborative field.

The time when the investment gurus ruled the scene is probably past.

The U.S. investor Warren Buffett remains the most famous star investor, but at 84, he is an old man – far older than Mr. Gross, 70. When Mr. Buffett steps down, the empire he built will likely be restructured by level-headed managers using rational thought processes.

Like Mr. Gross, Mr. Buffett profited from the long period of declining interest rates and the capital markets taking an unprecedented upswing, driven in large measure by lax monetary policies of the central banks. He has always stressed that he buys shares only in companies he understands. One of his early successes was his investment in Coca-Cola, but selling beverages does not require a complicated business model.

Today, as stock markets are becoming populated by new corporate giants that are constantly reinventing their business models, from Google to Alibaba, Mr. Buffett’s idyllic investment strategy is undoubtedly reaching its limits.

If any of the high-profile investment stars stick around, they will have to settle for being figureheads, whose primary influence will be felt outside, not inside, the companies they invest in.

 

The author is a Handelsblatt correspondent in New York. To contact the author: wiebe@handelsblatt.com

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