What investors can learn from Bill Gross’s bombshell and Tesco’s troubles

published 29 September 2014

140929-bill-gross — Gross: a turning point for bond markets?

On Friday, the investment world was rattled by news of a major personnel shift.

Bill Gross once known as the bond king' and head of the biggest bonds fund in the world left Pimco for a much smaller rival, Janus Capital.

I could provide you with a poorly thought-out football transfer metaphor to give some perspective on this. But I have no interest in footie, so I'd just make a fool of myself.

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Instead, I'll just suggest you look at the share price reaction Pimco's share price slid by 3.5%. Janus, meanwhile, leapt by 33%.

That tells you what investors thought of the move. But what can the likes of you and I learn from it?

Does the fall of Bill Gross signal a turning point for bond markets?

Why is Gross, now 70 years old, leaving Pimco the company he founded? And for such a tiny rival? According to the FT, who spoke to "people familiar with the matter", he jumped before he was pushed.

There have been problems at the company for a while. Investors have been pulling money out of bond funds as the end of quantitative easing (QE)draws nearer.

But they have also been pulling money out because Gross after years of beating the bond market has been doing badly more recently. As Gillian Tett notes in the FT, this year his "flagship fund is in the bottom 20% of industry tables, measured by returns".

And there was some nasty and public dirty laundry washing earlier this year, when Mohammed El-Erian, the high-profile star viewed as Gross's successor, quit the firm.

In short, it looks like Gross went from being Pimco's main asset to loose cannon and liability in a very short space of time.

So why should you care? I think there are two main points of interest here. Firstly there's the significance to the bond market. Part of me wonders if this is another top of the market' bell being rung here. Just as Alibaba's success should give equity investors pause,maybe Gross's move is a huge warning for bond investors.

It may seem an odd thing to say Gross hardly dictates the macroeconomic environment single-handedly and it's true that there's no science to these things. But there is a reason that these sorts of events often happen at turning points.

Gross was the bond king' for so long because, as Tett notes, he spotted the big trend the slow death of inflation in the 1970s. He thrived in the multi-decade bull market that followed. But as the age of QE starts to draw to a close, he has struggled.

If you read his regular missives from Pimco, it was clear that he understood the world was changing. All that new normal' stuff was coined by Pimco and El-Erian. But you could also see that he was struggling to find a new narrative a new grand storyline that would explain the post-2008 world.

Now that he's finally fallen off his perch, you have to wonder if we're near a turning point. Something akin to what happens when the last bear in a bull market capitulates.

Management matters, believe it or not

But beyond that, to me this is a great example of why you can't really dismiss management when you're looking at a company. I often hear people quote lines from Warren Buffett or Peter Lynch to the effect that you should buy companies that any fool could run because one day they will.

But this is rubbish. Or at least, it's frequently misinterpreted. Management is such an intangible that investors would often rather ignore it. So they're happy to take the line that it can be ignored.

But Buffett clearly takes management of his own company seriously he wouldn't spend so much time agonising over succession planning otherwise. And one reason I worry about investing in Berkshire Hathaway is precisely that what happens when Buffett is gone?

If a superstar' dominates a company, then you get a dangerous situation. While things are going well, no one questions anything. Their personality quirks and everyone has them are seen as part of their genius.

But when things start to slip, the cracks begin to show. You often find that success and rapid growth mean that the toughest questions have gone unasked, and people have sat back on their laurels. Attention to detail has gone awry.

Tesco is another great example. Sir Terry Leahy has largely escaped scrutiny over the latest pile-up at Tesco. But you have to wonder how much of this current trouble is a legacy of his overall strategy of squeezing suppliers, underinvesting in stores, and going for growth at all costs. The hard questions are being asked now that the growth strategy has failed but the rot set in way before Leahy stepped down.

Our regular contributor Jonathan Compton looked at why management matters in a recent issue of MoneyWeek magazineand tipped four promising companies. We'll also be looking at more on Gross's story in the next issue - if you're not already a subscriber you can get your first fourissues free here.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.