American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Sept. 2014 – Investing and the Cult of Personality

Bill Gross rocked the mutual fund industry in late September by resigning from Pacific Investment Management Company (PIMCO), the firm he founded in 1971, to join Janus Capital. Much of the ensuing media coverage has focused on the human drama surrounding his decision, rather than the important lesson this episode provides for investors.

PIMCO describes its investment approach as one that includes “macroeconomic forecasting, authoritative sector and security analysis and
rigorous risk management” and indeed Mr. Gross developed a reputation as the best “quant” in the fixed income business.

During Mr. Gross’s tenure PIMCO’s assets under management (AUM) reached $2 trillion. The firm’s flagship Total Return fund boasts a remarkable track record with an average total return of 7.9 percent per year since 1987, versus 6.8 percent for the benchmark Barclays U.S. Aggregate Bond Index. For many years the fund laid claim to the highest AUM of any mutual fund in existence, by wide margin; it was eclipsed only late last year by the Vanguard Total Stock Market Index fund. The Economist has cited three reasons for his departure. Mr. Gross is said to have displayed an abrasive management style. He had also demonstrated aberrant public behavior. Perhaps most significantly, his fund’s performance had suffered recently. The first two factors demonstrate the perils of relying heavily on an individual’s supposed prowess in forecasting.

Investors who rely on a manger’s talent are staked not only to the human foibles that manager might display but also to whatever fate might befall any individual, including poor health, early retirement, and death itself, to name a few. With regard to the third reason, we can only observe that forecasting invariably involves missed calls, and PIMCO’s efforts have fallen short. In 2009 Mr. Gross and his colleague Mohamed El-Erian famously proclaimed the emergence of a “new normal” that would be characterized by several years of below average equity returns, but this prediction was followed by one of the greatest bull markets in history. In 2011 Mr. Gross boldly predicted that curtailment of the Fed’s quantitative easing policy would result in lower bond prices and higher interest rates, and he backed his words by shortselling Treasuries in the Total Return fund. His reputation, and the fund’s returns, took another hit when lower bond prices failed to materialize.

Our approach does not rely on forecasting nor does it rely on any individual’s alleged acumen in security selection. Our approach is well grounded in economic theory and is subject to continued empirical testing. Advisors in our Professional Asset Management service are thoroughly versed in an investment approach that is timeless and designed specifically to avoid the influence of individual opinion.

Also in This Issue:

Identity Theft and What You Can Do About It
Information, Insider Trading, and Shareholder Value
Indexing: Too Much of A Good Thing?
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles