According to the 'Bond King' or bond investor extraordinaire William Hunt 'Bill' Gross, the good times may be over and many asset prices may drop in 2015. Record-low rates have failed to spur enough economic growth, according to Gross, and he believes the Fed may not be in a position to hike rates until late this year, if it at all does.
"With the dollar strengthening and oil prices declining, it is hard to see even the Fed raising short rates until late in 2015, if at all," said Gross, who is now in charge of the Janus Unconstrained Bond Fund. In an investment outlook for the Janus Capital Group, Inc. (NYSE:JNS), Gross said investors would look for alternatives to risky assets.
Gross Warns of 'Minus Signs of Returns'
Gross seemed extremely cautious on 2015. Global economic growth is not enough even after years of low rates, and this may lead investors to seek alternatives to risky assets. The fact that borrowing costs are still stuck at near zero even after over half a decade of the end of the recession shows investors' lack of confidence in the economic strength.
"Be cautious and content with low positive returns in 2015. The time for risk taking has passed," said Gross. He added, "At some future date... asset returns in many categories may turn negative."
This year has already begun on a dismal note for the benchmarks, registering their biggest declines to begin a year since 2008. The Dow, S&P 500 and Nasdaq are down 2.6%, 2.8% and 3.1%, respectively, year to date. However, 2014 too had begun with losses for these benchmarks.
Gross however supports holding high-quality assets that have stable cash flows. He said that investors' focus on "Treasury and high-quality corporate bonds, as well as equities of lightly levered corporations with attractive dividends and diversified revenues both operationally and geographically."
Bill Gross warned of "minus signs in front of returns for many asset classes" at the end of 2015. The creation of cheap money by the central banks might face a troubled end. Gross believes that the realization of the debt supercycle approaching an end would show the markets' gains as 'debt-fueled sugar high,' reported The Wall Street Journal.
The recent years of the Bull Run was sparked by low rates and accelerated credit growth. Gross states that the central banks have countered challenges by rounds of credit creation and low rates. Gross said:
The power of additional and cheaper credit to add to economic growth and financial-asset bull markets has been underappreciated by investors since 1981…Investors have continued to assume that monetary (and at times fiscal) policy could contain the long-term business cycle.
However, Gross believes that the debt supercycle is nearing its end. It ends "when yields, asset prices and the increasing amount of credit place an unreasonable burden on the balancing scale of risk and return."
Global economic growth concerns surfaced in 2015, with the eurozone particularly posting dismal growth numbers. Japan too had entered a technical recession. Chinese economic data was shaky as well. However, the U.S. has outperformed these major economies and reported 5% growth in the third quarter of 2014. Gross believes that the growth rates in developed and developing nations are failing as a lot of capital is put into "risk-free" capital markets instead of the real economy.
Now, there are concerns about Greek exiting the euro. The latest turmoil comes while the oil prices have slumped below $50 a barrel. These factors have combined to send the U.S. markets tumbling by the worst margins to start a year since 2008.
In the Fed statement following the two-day policy meeting last month, the central bank sounded positive regarding economic growth and also mentioned that they will show some patience before hiking interest rates. The Fed stated:
Based on its current assessment, the committee judges that it can be patient in beginning to normalize the stance of monetary policy.
Investment Grade Bond Funds to Benefit
A low interest rate environment is favorable for investments in bond funds. This stems from the fact that market value of a bond is inversely proportional to the interest rates.
The primary forms of bond risk include default risk and the interest rate risk. The latter is obviously the most important these days. Meanwhile, global government bond yields dropped to a new low recently. 10-year U.S. Treasury note yield was down to 1.964% on Tuesday, the lowest since May 2013.
Gross warns that investors "do not look, therefore, for economic growth to be the magic elixir for 2015." He suggests, "Investors should be flexible and consider more liquid securities. Fixed income with shorter maturities is one starting place."
Investors agreeing with Gross' views may thus look for investing in Investment Grade Bond funds. Bill Gross suggests "high-quality corporate bonds." Here we will suggest 2 Investment Grade Bond Funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect the funds to outperform its peers in the future. The funds have decent 1-year return. They also have beta of less than 1. Funds having betas within this range will show less volatility than the broader markets.
BlackRock Total Return Services (MUTF:MSHQX) seeks total return that outperform Barclays Capital U.S. Aggregate Bond Index. Over 90% of the fund's assets are invested in varied fixed-income securities such as corporate bonds and notes, mortgage-backed securities, asset-backed securities, convertible securities, preferred securities and government obligations. It mostly invests in investment grade fixed-income securities. It is a feeder fund, investing in a corresponding "master" portfolio.
The fund has a one-year return of 8.3% and carries a Zacks Mutual Fund Rank #1 (Strong Buy). It has a one-year beta of 0.94. It carries an expense ratio of 0.76% as compared to category average of 0.86%.
Nuveen Core Plus Bond A (MUTF:FAFIX) seeks to provide current income along with limited risk to capital. It invests the majority of its assets in bonds. These include U.S. government securities that may include zero coupon securities, residential and commercial mortgage-backed securities, and corporate debt obligations among others.
The fund has a one-year return of 5.2% and carries a Zacks Mutual Fund Rank #1 (Strong Buy). It has a one-year beta of 0.92. It carries an expense ratio of 0.77% as compared to category average of 0.86%.
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