Pimco’s Bill Gross Says Buffett to Soros Careers Fueled by Expansion: “What if there is a future that demands that an investor – a seemingly great investor – change course, or at least learn new tricks? Ah, now, that would be a test of greatness: the ability to adapt to a new epoch. Investors should be judged on their ability to adapt to different epochs, not cycles.”

Gross Says Buffett to Soros Careers Fueled by Expansion

Bill Gross, manager of the world’s largest mutual fund, said the most renowned investors from Warren Buffett to George Soros may owe their reputations to a favorable era for money management as expanding credit fueled gains in asset prices across markets.

The real test of greatness for investors is not how they navigated market cycles during that time, but whether they can adapt to historical changes occurring over half a century or longer, Gross, 68, wrote in an investment outlook published today entitled “A Man in the Mirror,” named after a song by Michael Jackson.

“All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience,” Gross wrote. “Perhaps it was the epoch that made the man as opposed to the man that made the epoch.”

Gross, one of the co-founders in 1971 of Newport Beach, California-based Pacific Investment Management Co., is examining his legacy as the bond shop he built over four decades is seeking to adapt to an environment that looks very different from the bull market that fueled Pimco’s growth to one of the largest money managers in the world. The prospect of elevated market volatility, an aging population and climate change could make investing far more challenging in the coming decades, Gross said.‘New Normal’

Pimco in 2009 started an expansion into equities to prepare for an eventual end of the decades-long bond rally. Gross, whose firm coined the term “new normal” that year to describe an economic environment characterized by below-average growth, elevated unemployment and a declining role for the U.S. in the global economy, suggested those changes could potentially be part of a longer-lasting shift.

“What if zero-bound interest rates define the end of a total return epoch that began in the 1970s, accelerated in 1981 and has come to a mathematical dead-end for bonds in 2012/2013 and commonsensically for other conjoined asset classes as well?” Gross wrote. “What if quantitative easing policies eventually collapse instead of elevate asset prices?”

Soros is the legendary hedge-fund manager best known for a 1992 bet that the Bank of England would be forced to devalue the pound. Buffett is the chief executive officer of Berkshire Hathaway Inc. (BRK/A) who built the firm over almost five decades through takeovers and prescient stock picks, and Daniel Fuss is a bond manager who runs the top-performing Loomis Sayles Bond Fund.

‘Achilles Heel’

Gross said investors such as Bill Miller, the stock picker who beat the Standard & Poor’s 500 Index for a record 15 years before his streak ended in 2005, are prone to exposing their “Achilles heel” the longer they stay in the money-management business. Miller may, in fact, be a great investor, although he would need five or six more years on top to prove it, Gross said. Peter Lynch, the Fidelity Investments manager who ran the Magellan fund, made a smart move by leaving when the “gettin’ was good,” according to Gross. Lynch earned the highest returns in the industry from 1977 to 1990, averaging annual gains of 29 percent before stepping down.

Gross, who is often referred to in the media as “the bond king,” runs the $289 billion Pimco Total Return Fund (PTTRX), which has advanced 7.9 percent over the past five years to beat 94 percent of peers. He is co-chief investment officer of Pimco, a position he shares with Mohamed El-Erian. Pimco, which manages about $2 trillion, is a unit of German insurer Allianz SE. (ALV)

“There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne,” Gross said.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

PIMCO’s Gross sees major challenges for “total return” era

12:19pm EDT

By Sam Forgione and Jennifer Ablan

NEW YORK (Reuters) – Bill Gross, manager of the world’s largest bond fund, said on Wednesday that the Federal Reserve’s aggressive monetary policies may have changed the landscape so greatly that investors like himself and Warren Buffett may face radically new challenges in trying to maintain their track records.

Gross, who oversees the $288 billion PIMCO Total Return Fund and is co-chief investment officer of its parent company, Pacific Investment Management Co., said the aggressive monetary policies of the Fed as well as other longer-term structural shifts in demographics, geopolitics, and/or commodity supplies could make life harder for investors.

In his April letter posted on PIMCO’s website, entitled “A Man in the Mirror,” Gross said that since the early 1970s when credit began its “incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of ‘greatness.'”

“What if perpetual credit expansion and its fertilization of asset prices and returns are substantially altered?” Gross asked. “What if zero-bound interest rates define the end of a total return epoch that began in the 1970s, accelerated in 1981 and has come to a mathematical dead-end for bonds in 2012/2013 and commonsensically for other conjoined asset classes as well?”

Such a scenario could potentially cause asset prices to decline instead of rise, Gross said, who is often referred to as the “Bond king.” He helps oversee more than $2 trillion in assets at PIMCO.

Gross previously has said that the Fed’s monthly purchases of $85 billion in Treasuries and agency mortgage securities have propped up assets on just about everything, including stocks and bonds, resulting in their being overpriced. To keep performance high, some managers have gone beyond their comfort zones and expertise, taking on too much risk.

“What if there is a future that demands that an investor – a seemingly great investor – change course, or at least learn new tricks? Ah, now, that would be a test of greatness: the ability to adapt to a new epoch,” he said on Wednesday.

“There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne,” Gross said.

“All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience,” he said, referring to investors George Soros and Dan Fuss.

Gross admitted that his measured risk-taking method did not work well for a few months in 2011 when he underestimated the contagion effect from the European debt crisis and the U.S. debt ceiling budget battle. That year, he bet against U.S. Treasuries, which were one of the biggest outperformers of 2011.

Gross on Wednesday said of his risk exposure: “It didn’t work too well for a few months in 2011, nor in selected years over the past four decades, but because credit was almost always expanding, almost always fertilizing capitalism with its risk-taking bias, then PIMCO prospered as well.”

In 2012, Gross made a huge comeback with his prescient bets on mortgage-backed securities. The Total Return fund posted returns of 10.36 percent, more than double that of the benchmark Barclays U.S. Aggregate Bond Index.

Gross, on Wednesday, said: “Investors should be judged on their ability to adapt to different epochs, not cycles.”