Last week, the investment world was shocked by the announcement that Bill Gross, the founder of PIMCO and the man often referred to as the “Bond King”, was leaving PIMCO to join Janus Capital.  We have known Bill Gross, PIMCO and many former PIMCO portfolio managers for almost three decades.  It has been more than a decade since we owned any PIMCO funds.  For several years, we were not only concerned about the size of the organization, but the internal workings at PIMCO.  Bill often considered himself “The Great I Am”.  What happened at PIMCO is sad, but not unexpected to us at THOR.  Below is an excerpt from the Harvester newsletter we issued on July 3, 2014 about our trip to the Morningstar Conference.

“The most interesting presentation of the conference was from Bill Gross of PIMCO Asset Management.  It was not interesting from a market standpoint, but was interesting from the standpoint of watching an iconic firm and manager collapse.  We have known PIMCO since the late 80’s.  In fact, PIMCO’s marketing head helped THOR create its first brochure.  We have from time to time purchased a PIMCO fund – a commodity fund and a foreign bond fund over a decade ago – and currently have a significant amount of fixed income investments with a group that left PIMCO in the 90’s.  If you read the article by MarketWatch on his speech, you would get the impression that he spoke about wisdom.  However, the speech came across as a company that is on the verge of collapse.  Last March, Mohamed El-Erian unexpectedly left as CIO of PIMCO in what apparently was a rift with Bill Gross.  Bill’s speech was fragmented, self-aggrandizing, long-winded and at times incomprehensible.  This was not only our belief, but the belief of many of the attendees with whom we spoke to at the conference.”

Research is much more than just reading and looking at statistics.  It is about “kicking the tires”, due diligence, talking to current and former team members and deductive reasoning.  It is a shame to see this happen to a great firm like PIMCO.

What does this mean for Investors?

There is going to be volatility in the bond market over the next few weeks and months.  Investors will liquidate their holdings in PIMCO as they look for other alternatives.  If you currently own PIMCO funds, now may be a good time to sell them.  The timing of this move, coupled with the end of tapering, will likely make things interesting in the bond market.  We are especially concerned about the high yield or “junk” bond market.  A rise in covenant-lite bonds, narrowing spreads and loss of liquidity (the Fed tapering and PIMCO liquidating to handle withdrawals) is not a good recipe for this segment of the bond market.  It is why we have the lowest exposure to high yield bonds in our firm’s history.

Book of the Month – The Art of Thinking Clearly by Rolf Dobelli

This is great working book for everyone and sits on the top of Jim’s desk.  Each chapter is three to four pages long.  It is good to read one chapter a day and reflect on that chapter.  The epilogue sums up the book very well.  Centuries ago, the Pope asked Michelangelo “Tell me the secret of your genius.   How have you created the statue of David?”  Michelangelo’s answer: “it’s simple.  I removed everything that is not David.”  The book is about learning how to eliminate those things that are in our way.  Medieval thinkers had a term for this: “via negativa”, which translated means “the negative path”.  Eliminate the downside and the upside will take care of itself.  The book is a great gift for young people starting their working career.

Interesting fact – more than 40% of the stocks in the Russell 2000 Index are down more than 20% from their 52-week highs.

Sincerely,

Your THOR Team