Gross: Curb expectations

The market may have rallied over the past several weeks, but Bill Gross is sticking to his opinion that investors will never again see the returns and profits of a few years ago. Speaking during InvestmentNews' ETF Insights online conference last Wednesday, the managing director and co-chief investment officer at Pacific Investment Management Co. LLC told attendees he still believes that the U.S. economy is in the “new normal.” “It's a world where growth slows down and where investment returns are half of what we have grown used to over the past 10 to 25 years.” Mr. Gross cited three major reasons that advisers should lower their clients' expectations, as well as their own: • The United States is deleveraging as a result of years of using extreme leverage. “That means that banks don't loan money like they used to, and it basically means that the small investor doesn't take risk as much as they had used to,” he said. • The government's push toward “re-regulation” will keep profits and growth in check. “It probably slows the economy down,” Mr. Gross said. “To us, regulation and re-regulation are not an investor's friend.” • In a new climate of “deglobalization,” other countries are focusing more on their internal growth than on expanding trade. As a result of these factors, economic growth will be half of what it was — averaging around 4% annually, he said. Profits will remain around 4% to 5% instead of the previous levels of 8% to 9%, Mr. Gross said. “This isn't a forecast that says, "Bear market — run for the hills,'” he said. “It's a world where if we have less growth, less leverage and the inability to siphon funds from Main Street to Wall Street, you'd better expect rates of return in the general vicinity of 5% to 6% total.” One area of business that will never be the same again is Wall Street, Mr. Gross said. Not only have a number of firms closed up shop, but even more are revamping the way they compensate their people. He said he believes that these changes will be permanent.
“It's hard to envision, with regard to [The] Goldman Sachs [Group Inc.] and others, that we could return to the days where financiers, portfolio managers and investment bankers were revered above all else,” Mr. Gross said. Financial advisers need to prepare their clients not to expect the double-digit returns of the old days, he said. “Bring your standards down in terms of what you require for college ... and what you require for retirement, because the ability to live off double-digit asset returns are severely diminished,” Mr. Gross said. He advised financial advisers to use dividend-paying stocks, corporate bonds and emerging-markets debt as instruments that will provide solid returns in this new environment. Mr. Gross estimated that a household should have 25% of its portfolio invested in non-dollar-denominated currency. Exchange-traded funds, a sector Pimco entered for the first time this year, are inexpensive and allow investors to get in and out of the market quickly, which is an advantage in this new world, Mr. Gross said. He conceded that while Pimco was late to the ETF game, the firm is committed to the investments for the long term. While many industry officials agree with Mr. Gross that the economy may never be the same again, not everyone believes that advisers should settle for a 5% to 6% annual investment return.

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“I think very few people have enough assets to live well off that rate of return,” said Ken Kam, portfolio manager for Marketocracy's Masters 100 Fund. “I think advisers have to do more.” And although things may look gloomy right now, not everyone is convinced that this “new normal” is definitely here to stay. “We can't count out innovation yet,” said Scott Burns, director of ETF analysis at Morningstar Inc. “In the mid "90s, it was looking the same way, and then” the Internet took off. E-mail Jessica Toonkel Marquez at jmarquez@investmentnews.com.