What Morningstar’s fund analysts are hearing about Bill Gross’ views on stock returns.
This article originally appeared in the October/November 2012 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.
PIMCO Total Return PTTRX manager Bill Gross made headlines for declaring, “The cult of equity is dying.” Gross’ statement was reminiscent of a legendary 1979 BusinessWeek cover story proclaiming the death of equities, a prediction that turned out to be inaccurate as equities embarked on a multidecade rally. Certainly, there are plenty of macroeconomic concerns that have made investors pessimistic about future equity returns. The prolonged European debt crisis, the U.S. fiscal state, and turmoil in the Middle East have kept market volatility high. Many investors are still reeling from severe losses during the financial crisis. According to Morningstar fund-flow data, investors have yanked nearly $91 billion from equity mutual funds in the trailing year through July while pouring more than $216 billion into taxable- and municipal-bond funds. Still, equity ETFs have seen $81 billion in inflows in the same period. And the prospect of rising interest rates and inflation makes the picture for fixed income murky. Many managers remain confident in equities’ long-term potential.
“The Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned. The simple point, though, whether approached in real or nominal space, is that U.S. and global economies will undergo substantial change if they mistakenly expect asset price appreciation to do the heavy lifting over the next few decades.”
“Whether GDP growth in the U.S. and other developed economies is going to be slower in the future is not, in and of itself, a reason to expect a lower return to equities.”
“Bonds are thought to be lower-risk investments; we believe that, at today’s prices, long-term bonds are very risky.”
“The good news is that it is not all doom and gloom for investors. Stocks appear inexpensive, particularly if earnings remain strong. Margins are near all-time highs, companies are running lean, and balance sheets are incredibly healthy and flush with cash.”
Perkins Investment Management