Bill Gross, manager of the worldâ??s largest bond fund at Pimco, engaged in a bit of self-flagellation this week, acknowledging that his highly publicized bet against Treasury bonds early this year was, in hindsight, a â??mistake.â?
When 10-year Treasurys were yielding 3.5 percent in January of this year, Gross said that they were â??the most overvalued bond in the universeâ? as he made a well-publicized decision to bet against U.S. debt going forward. Since then, Treasury bonds have rallied, and their rising prices have pushed yields even lower â?? falling briefly below 2 percent this month â?? which has caused the year-to-date return of his Total Return Fund to rank near the bottom of its peers. Over the past three months, the fund has trailed its benchmark by nearly three percentage points.
So what lessons should investors draw from Grossâ??s experience?
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Nathan Hale, a pseudonym, has spent over ten years working for one of the largest firms in the financial services industry. During his career, he's researched and written extensively about personal investing, the mutual fund industry, and financial services, contributing to a number of books and articles. In this role, he uses a nom de plume because many of his opinions about the mutual fund industry and its practices would not endear him to its participants.
In my nearly 15 years in the financial services industry, I've had the opportunity to see the industry from perspectives that very few people are privy to. I've contributed to books, articles and academic papers that examine nearly every facet of the industry. This study has led me to develop some very strong feelings, which can be summarized with a simple general statement: Your interests and the interests of those who manage your money are often in direct conflict. Of course there are exceptions to this, but they are discouragingly rare. In light of this fact, the vast majority of my investments are held in index funds. I do own a few different actively managed funds, believing, yes, that I'm an above-average investor, and can win against all odds.
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