By Andy Serwer
At one point, Bill Gross, co-founder of the Pacific Investment Management Co., ran the biggest bond fund in the world. The Pimco Total Return fund had almost $293 billion in assets in 2013 and delivered market-beating performance to match. In the 15 years through February 2014, his fund returned an annualized gain of 6.68%, versus 5.19% for the average intermediate-term bond fund. It's no wonder he was famously crowned the Bond King.
Gross is retired now but still plays the market to a greater degree than most of us. "Actually, I've got a few clients," he tells me. "I've got a large foundation, my largest client, which is $500 million, and then there's my own money and my kids' trust money. So, there's a lot of money working."
Gross would be the first to admit that he was greatly aided by the long sleigh-ride decline in interest rates from 1981 to 2020. Not surprisingly, he has since changed his tune.
"I don't like bonds," he says baldly. So, there you have it. The Bond King is down on bonds.
What does Gross favor, then? While he may be disinclined toward investing in debt, he can't seem to quit the yield habit and is keen on "bond equivalents where the return is relatively steady, the risk is relatively low, the tax benefits are very high." Those qualifiers have steered him primarily in one direction: oil and gas pipeline master limited partnerships.
"There are only six or seven of these things left, and the reason they're so attractive is that, first of all, their dividends, by law, are deferred until sold," he says. "And second of all, mutual funds, for the most part, can't buy into partnerships, and so you have this huge base of potential buyers that have been cut out of the market because of regulatory law." That lack of buyers helps keep MLP share prices low, which boosts yield to "attractive, 8% to 9% tax-deferred yields."
"[The MLPs] have gone up by 25% to 35% over the past 12 to 18 months. It has been wonderful. It has been almost as good as artificial intelligence," he says, chuckling.
Is there still upside at this point, I ask him.
"I think they've sort of peaked out in terms of price appreciation, but the yields [look solid], assuming there aren't any disasters in terms of energy and pipeline regulatory measures going forward. If you blend in a tax deferral, which I do, it's really a 10% or 11% equivalent yield to basically anything else."
Gross singles out Energy Transfer, "the biggest in the business, which yields about 7.9%." But he cites Western Midstream Partners as his favorite. "Western just raised its dividend by 30% to 40% in the past two or three months, and the market really doesn't have a sense of that. It yields 9.9% tax-deferred, and its prospects are good. I know how you go wrong, but I don't think you go wrong."
Gross, who has busied himself trading meme-stock options lately, is also in some plain-vanilla equities. "I've taken a dabble in some of the conservative AI [stocks], I own Microsoft, and I own IBM. Never in Nvidia, just too upside/downside for me," he says.
He also sees a newfangled wrinkle to the OGs of dividend stocks. "There's an interesting play now in utility stocks. They've done very well, and it's not necessarily because interest rates have gone down a little," he says. "It's because of the tremendous demand for power from AI-types of companies. And so, you see stocks like Con Edison and Dominion Energy and so on that, despite their low yields of 4% or so, have gone up by 10% or 15%. And so there's a little bubble potential there. But I think utility stocks, believe it or not, have the potential to go higher."
If that trade works out, maybe we should rename Gross the Utility King.
Write to Andy Serwer at andy.serwer@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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May 16, 2024 02:00 ET (06:00 GMT)
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