Bill Gross Has a Wake-Up Call for Investors

A rare stamp collection makes for an unusual alternative investment. Unlike most other tangible stores of value, old stamps will most likely be useless in a post-apocalyptic world. So philatelists must generally be confident in their convictions that civilization won't be beset by an unforeseen blight in the near term.

That's exactly the type of confidence you want to see in a long-term investment manager. Bill Gross currently owns the Holy Grail of stamp collections, and he is a realist. He has both attended business school at UCLA and augmented his risk-management skills at the blackjack tables in Las Vegas.

With his current employer, the Allianz-owned (NYSE: AZ  ) fund group PIMCO, Gross has built a reputation that can move markets. Today, he manages the company's Total Return Fund, the world's largest bond portfolio:

Expense Ratio

0.46%

Fund Size

$185.7 billion

1-Year Return

18.4%

5-Year Annualized Return

6.8%

10-Year Annualized Return

7.6%

Source: Morningstar. Figures reflect institutional class of shares.

Top 5 Holdings As of Oct. 23, 2009

Net Position as % of Net Assets

Government-Related

48%

Mortgage

22%

Investment-Grade Credit

17%

International Bonds

6%

Municipal Bonds

3%

Source: Allianz. As of Sept. 30.

Mother, should I trust the government?
Lately, Gross has advocated risk aversion due to a lack of political discipline, loss of human capital, and resistance to change. In his most recent commentary, Gross argues that the U.S. has been living in a fantasy land, and that it's time for a reality check.

Focusing on the state he now calls home, Gross points out that "California's property taxes, income taxes, and sales taxes were all artificially elevated by national and indeed global imbalances as the U.S. manufactured paper, and Asia manufactured things in mercantilistic exchange." So, while asset bubbles gave investors the illusion of lasting wealth, they also kept governments afloat with copious tax revenues. Now that those bubbles have popped, we have a national budget deficit topping $1 trillion, and the state of California has had to resort to IOUs to pay bills.

Human capital depletion
Gross notes that the impact of all this goes well beyond finance. "What California once had and is losing rapidly is its 'capital': unquestionably in its ongoing double-digit billion-dollar deficits, but also in its crown-jewel educational system that led to Silicon Valley miracles such as Hewlett Packard (NYSE: HPQ  ) , Apple (Nasdaq: AAPL  ) , Google (Nasdaq: GOOG  ) , and countless other new-age innovators," Gross says.

Despite the fact that California's schools currently receive 40% of the state's general fund, they are ranked among the nation's worst. Now, more people exit the state than move there. And the U.S. is experiencing a similar emigration occurring among foreign-born, domestically educated scientists and engineers who leave America in search of better opportunities back home.

Doggie bags
Gross uses resonating imagery to describe changes that society is undergoing. Whereas the term "doggie bag" used to refer to leftover treats from restaurants, it now also stands for the small plastic bags that dog owners use to clean up after their beloved canines. That transformation in usage is the key to Gross' two-pronged metaphor, which he basically uses to illustrate how critical it is for the U.S. to turn things around now and the possible consequences if we fail.

Yet Gross remains skeptical. "Now that our financial system has been stabilized, one wonders whether California's 'Governator' and indeed the Obama Administration has the capital, the vision, and indeed the discipline of its citizenry to turn things around," he ponders.

If California is to be seen as a microcosm of the United States proper, then there's solid ground for that skepticism. Our established system of paper-shuffling must do an about-face in order to compete in a global economy based on actual production. As Gross sees it, it will take resilience on the part of our elected officials and ourselves in order to ensure that the transition goes smoothly.

How to invest now
Gross does make one thing clear: This environment is not one in which investors should be taking on a lot of risk.

A skeptic true to his words, Gross has been seen in the news recently unwinding massive positions in mortgage-backed securities issued by government-backed mortgage finance firms Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) . Although he points out that steady dividend-paying stocks could survive the new economy -- one thinks of stocks like Coca-Cola (NYSE: KO  ) , for example -- Gross sees "slower growth, muted profit gains, and potential capital destruction via default, abrogation of property rights, and dollar devaluation" contributing to make things difficult for investors in the future.

Stay tuned for the next installment in this ongoing series, in which Chris takes a look at what Legg Mason's Bill Miller has to say on recession, recovery, and winning streaks.

Further reading:

Google is a Motley Fool Rule Breakers selection. Apple is a Motley Fool Stock Advisor pick. Coca-Cola is a Motley Fool Inside Value selection and a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Chris Jones owns no shares of any company mentioned in this article. Try any of our Foolish newsletter services free for 30 days. Listen, Sheriff, I know I've jerked you around before, but this is for real now. I'm in the Fratellis' basement, with The Motley Fool's disclosure policy ...


Read/Post Comments (0) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1019270, ~/Articles/ArticleHandler.aspx, 10/20/2014 12:44:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 16,380.41 263.17 1.63%
S&P 500 1,886.76 24.00 1.29%
NASD 4,258.44 41.05 0.97%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/17/2014 4:00 PM
AAPL $97.67 Up +1.41 +1.46%
Apple CAPS Rating: ****
AZ $12.45 Down +0.00 +0.00%
Allianz SE (ADR) CAPS Rating: ***
FMCC $2.07 Up +0.14 +7.25%
Freddie Mac CAPS Rating: **
FNMA $2.16 Up +0.12 +5.88%
Fannie Mae CAPS Rating: **
GOOGL $522.97 Down -13.95 -2.60%
Google (A shares) CAPS Rating: ****
HPQ $34.16 Up +0.16 +0.47%
Hewlett-Packard Co… CAPS Rating: **
KO $42.88 Up +0.32 +0.75%
Coca-Cola CAPS Rating: ****

Advertisement