Gross Says High Fees Buy Hope, Not Performance
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Wednesday, July 29, 2009

Gross Says High Fees Buy Hope, Not Performance

In Bill Gross' latest monthly investment outlook, PIMCO's star manager is highly critical of fund management fees industry-wide. Gross suggests that the fees investors pay represent a compensation for hope rather than performance, and dubs the products money managers sell "investment potions."

Gross figures that stock funds remove an average of 99 bps in fees from investors portfolios per year, while the average bond manager charges 75 bps. He also points out the fact that the expenses for many money market funds hover around 38 bps -- a level he calls as deceptive as a "street-con game," as most money market funds currently barely manage to eke out 38 bps in returns.

Equally troubling to Gross is the fact that nearly 90 percent of the $1.5 trillion of 401(k) and other defined contribution assets in mutual funds are in actively managed funds with expenses close to 1 percent. While Gross notes that this level of expense was "tolerable" in an era of double-digit returns, it is now unacceptable in the "new normal" of lowered expectations for investment returns. As a point of comparison, Gross' own Pimco Total Return fund charges 46 bps.

This new normal, Gross predicts, will be a time of permanently reduce GDP and a necessary restructuring of business models nationwide.

"A 3 percent nominal GDP 'new normal' means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model. High risk bonds, commercial real estate, and even lower quality municipal bonds may suffer more than cyclical defaults if not government supported," Gross explained.

His prescriptions for the new normal are simple: he advocates steady income-producing bond and equity market investments in companies with strong dividends stable balance sheets. No surprise, considering his fund bills itself as a core bond portfolio strategy that seeks maximum current income and price appreciation consistent with the preservation of capital.

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