The Hindu Business Line : Investment Nuggets

Christened as "The Peter Lynch of Bonds", Bill Gross is the astute founder and Managing Director of PIMCO (Pacific Investment Management), which has more than $667 billion in assets under management. His take on the bond markets is said to have been influenced by his early years as a professional blackjack player in Las Vegas. Inducted into the Fixed Analysts Hall of Fame, he is also the author of two popular books: Everything You've Heard about Investing is Wrong! and Bill Gross on Investing.

"After more than 30 years of managing institutional and individual bond monies, I have gradually come to the understanding that successful money management over long periods of time rests on two, somewhat disparate, foundations. The first is "a secular outlook" — that is, a three-year to five-year forecast that forces one to think long term and to avoid the destructive bile arising from the emotional whipsaws of fear and greed. Such emotions can convince any investor or management firm to do exactly the wrong thing during `irrational' periods in the market.

"The second foundation is what might be called the `structural' composition of portfolio management, and whether the reader agrees or disagrees with the secular thesis, I would argue that those who fail to recognize the structural elements of the investment equation will leave far more chips on the table for other, more astute investors to scoop up than they could ever imagine. A portfolio's structure is akin to its genetic makeup: It is how it is constructed without regard to short-term strategic decisions.

"Structure incorporates principles that are longer than secular, principles that are nearly paramount and should be able to deliver alpha during years when the manager's magic touch-to use a basketball metaphor-seems to have disappeared or when there's simply a time-out on the court, with secular investment opportunities few and far between. Duration, curve, credit, volatility, and other less obvious tilts to a portfolio's steady state status are what I mean when I speak of a portfolio's inherent structure, although some tilts are more volatile than others and, therefore, produce less risk-adjusted alpha."

"An investor needs to stay informed about the markets in order to decide what to buy and when to buy it. The asset allocation question is very customised — a personal question with an answer that depends on many variables such as current income, risk tolerance, tax bracket, age that they would like to retire, and so on. And as you might expect the bond guy to say yes, everyone should have some bonds in his portfolio. And speaking like a sales guy, if you invest in a diversified bond mutual fund, you could let someone like me do the driving for you. Let your portfolio manager decide whether you should be in munis, emerging markets, corporates or junk today."

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