Bond investing isn’t about forecasting

The best way to sell anything is to tell a story — and bond funds are no exception to this rule. When you talk to bond-fund managers, they love to talk about their thesis, or their strategy — some grand vision of the world which, they hope, you will find compelling. If you do find it compelling, then you’re much more likely to invest your money with them.

Why you would behave in such a manner is simple: if the manager is right about where the world is headed, then, goes the theory, that manager is going to outperform and make lots of money.

Similarly, if a bond fund starts underperforming, then the storytellers tend immediately to jump on his grand pronouncements about the state of the world, because his big macro view was surely the thing to blame.

Paul Krugman, for instance, wrote four separate posts devoted to the thesis that the fall of Bill Gross is in large part a function of Gross being wrong (and Krugman being right) about interest-rate behavior in a liquidity-trap environment. Joe Weisenthal agrees: he says that Gross’s worldview, circa 2011 or so, “ended up costing Gross his role in the company he created”.

Even in the wake of Gross’s departure, his macro view continues to cast a long shadow of Pimco. Landon Thomas, for instance, spent over a thousand words on Thursday examining whether it’s smart for Pimco to retain Gross’s “new neutral” thesis:

Pimco’s new management team is doubling down on their departed leader’s economic mantra. And in so doing they are making the case that the Pimco bond funds that have made investments based on this economic approach — with some performing better than others — will not soon change their strategy.

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