July 29, 2009 / 1:56 PM / 10 years ago

PIMCO's Gross blasts own industry for high fees

NEW YORK (Reuters) - Bill Gross, the influential manager who runs top bond fund PIMCO, on Wednesday lambasted his industry for charging investors hefty fees for subpar performance amidst the worst economic crisis since the Great Depression.

PIMCO's Bill Gross in an undated photo. REUTERS/Handout

In his latest investment letter to clients, Gross, co-chief investment offer of Pacific Investment Management Co., said roughly 90 percent of the $1.5 trillion in 401K and other defined contribution assets in mutual funds are “actively managed.” And yet many of those portfolio managers posted unspectacular performance for exorbitant fees, close to 1 percent, he asserted.

He likened the situation to the infamous Madame Rue selling Potion #9.

“I’ve never known any gold-capped tooth money managers, but without squinting very hard there is undoubtedly a strong resemblance between all of us “managers” and the infamous Madame Rue selling Potion #9,” Gross said. “Instead of love, though, we sell “hope,” but very few are able to seal the deal with performance anywhere close to compensating for the generous fees we command.”

Gross said investors paying for those potions during an era of asset appreciation with double-digit returns may have been “tolerable,” but if investment returns gravitate close to 6 percent as his firm envisions, “then 15 percent of your income will be extracted based on the beguiling promise of Madame Rue.”

He highlighted a recent Barron’s article that pointed out that stock funds extract an average 99 basis points or virtually 1 percent a year in fees from an investor’s portfolio, while bond managers at 75 basis points. Many money market funds manage to charge 38 basis points.

“Since money market funds barely earn 38 basis points these days, much of the return winds up in the hands of investment managers,” Gross said. “A mighty expensive potion indeed.”

For his part, Gross’ PIMCO Total Return fund, whose assets under management of $164 billion makes it the world’s largest mutual fund, ranks as a strong performer.

“On a grade scale, we have them at a ‘B’ because of their consistent performance, low fees and low volatility — that’s very good,” said Steven Carpenter, founder and chief executive officer of Cake Financial Corporation, an online independent management service in San Francisco, Calif. “That fund has also significantly outperformed the Standard & Poor’s 500 over the last two years,” Carpenter added.

The PIMCO Total Return fund charges 46 basis points to investors.

Gross reiterated that economic growth for the United States will fall short of recent years, expanding around 3 percent a year once it emerges from recession. The U.S. economy was growing at 5 to 7 percent a year for 15 years before it plunged into the worst recession in decades.

Slower growth means lower profit growth, permanently higher joblessness, constrained consumer spending and increased government involvement, Gross added.

“The “new normal” nominal GDP, the future return on our stock of labor and capital investment, will likely be centered closer to 3 percent, for at least a few years once a recovery is in place beginning in this year’s second half,” Gross said. “Diminished capitalistic risk taking and constrained policymaker releveraging will lead to that likely conclusion.”

Gross’s cautious outlook was echoed by Mohamed El-Erian, Pimco’s chief executive, who told Reuters on Tuesday it was too soon to declare the recession is over in the United States.

Editing by Diane Craft

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