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|William H. Gross|
Induction Speech for William H. GrossInducted December, 1996
President John Malvey’ s Hall of Fame Induction of William (Bill) H. Gross, Founder and Managing Director, Pacific Investment Management Company.
I’m Jack Malvey of Lehman Brothers, President of the Fixed-Income Analysts Society. On behalf of our Board, all of my member colleagues, and our many sponsors, I want to welcome our guests and the financial media to the highlight of our 17th Annual Bond Conference, today’s second annual Fixed Income Analysts Society "Hall of Fame" induction. I especially want to acknowledge the tremendous efforts of our Bond Conference Chairperson, Margaret Cannella of Citicorp, and our Past President’s Club seated over here. And I want to thank all of the Street firms, who have shown up en masse for today’s ceremony. Without your support and participation, this annual conference would not be possible.
For those of you who are not aware, the Fixed Income Analysts Society is a non-profit association formed in 1975 and dedicated to the education of its membership as well as the global fixed income community in general. Its membership ranks span a broad array of fixed-income professionals: analysts, strategists, economists, portfolio managers, and sales and trading professionals. In addition to our annual bond conference, our organization tries to schedule at least monthly outings on key topics of interest to academics and practitioners in the fixed- income community. For example, our society held a very well attended session on the evaluation of put securities on November 20th. We still don’t know how to properly evaluate these securities, but we came away comforted by the realization that no one else seemed to have any better ideas. Our program chair, Joe Labriola of Deutsche Bank, is very close to wrapping up a key session on new innovations in asset-backed securities, tentatively scheduled for the week of January 14th.
The Fixed Income Analysts Society is also proud of our inauguration of the FIASI "Hall of Fame" in 1995. Voted by our Board of Directors, this award honors outstanding practitioners and academic contributors to the development of fixed-income analysis and portfolio management. Following our inaugural last year of Marry Leibowitz (who we are delighted to have here with us today), we are very pleased to be inducting the second and third members of our Hall of Fame. First, the late Fischer Black of MIT/Goldman Sachs. Together with Myron Scholes, his seminal work on option valuation in 1973 provided the theoretical and practical foundation for much of the innovation across the global fixed-income capital markets during the past two decades as well as for many of the quantitative analytical tools now in use. Second, Bill Gross, a founder and managing director of Pacific Income Management Company (PIMCO), the largest and fastest growing total-return bond manager in the world. Just as Fischer Black pioneered analytical tools, Bill Gross’s methodology arguably has spawned the entire active total-return approach to fixed-income investing.
We should also add that the simultaneous induction of Fischer Black and Bill Gross are not coincidental. These two gentlemen are forever linked in their wonderful articles on "noise" in the capital markets. First, with Fischer's comments in the Journal of Finance (possibly the only paper published without formulas in this esteemed journal) and with Bill's equally wonderful observations on "noise" in the Journal of Portfolio Management.
To conduct the induction ceremony for Fischer Black, we also are pleased to have Emanuel Derman, director of quantitative strategies at Goldman, Sachs with us today. As most of you know, Emanuel Derman was a colleague and co-author with Fischer Black of many innovations, most notably the development of the Black-Derman-Toy option-valuation model, the basis for most of our existing fixed-income option valuation methodologies.
Now, it's time to honor Bill Gross.
Bill's sterling credentials are well known to most of us. He is a founder and managing director of Pacific Investment Management Company. Bill has been a prodigious writer on the bond market and probably the most-quoted expert on the global fixed-income capital markets. In a recent survey by Pensions and Investments magazine, Bill was acknowledged by his peers as the most influential and respected authority on the fixed-income capital markets.
Already, our conference brochure is out of date. Bill does not oversee the stated $75 billion listed; PIMCO's assets under management have rocketed up to approximately $85 billion. This represents more than 1% of all the fixed-income assets under management in the U.S.
Unless you have been reading Bill's remarkable monthly newsletter, you may not know that Bill grew up in Middletown, Ohio, near but not on Butler Creek. After graduating from Duke and serving as a naval officer on a destroyer off the coast of Vietnam, Bill obtained his MBA from UCLA. His marine drill sergeant was Sgt. Cruz (and he wants his dollar back), and he also answers to the name Father Guido Sarducci.
Bill was a founder of Pacific Investment Management Company, which began humbly with only several million of assets in 1971. By 1979, PIMCO crossed the $1.0 billion mark. By 1985, PIMCO had $10.0 billion under management. Today, PIMCO's assets have now topped $85 billion.
Even more impressive than the asset accumulation and, of course intertwined, is PIMCO's track record. PIMCO has consistently outperformed the bond market. Over the last 20 years, PIMCO has outperformed the market by an average of 1.25% annually. As we all well know, long-term averages can mask sharp swings in performance. But this is not the case with PIMCO. PIMCO has beat our Lehman index by 150 bp. on average over the last 10 years through September 30, 1996, by 140 bp. for the past 5 years, by 160 bp. for the past 3 years, and by 180 bp. this year. In fact, for all of the rolling 3-year periods from the first quarter of 1974 through the third quarter of 1996, PIMCO has outperformed for 79 of the 80 periods.
This track record is even more amazing given its longevity and the stunning, concurrent evolution of the bond markets. In professional sports, an all-star career operates at peak for about a decade. In corporate America, a star manager like a Jack Welch does well to be on top of his game for a decade and a half. But Bill's remarkable performance has gone on for nearly two ½ decades, a quarter century.
And just think of the changes in the capital markets. Last year's inductee, Marty Leibowitz, along with the legendary Sidney Homer, were just coming out with their manifesto on INSIDE THE YIELD BOOK. The U.S. bond market was confined mainly to governments and corporates. And the corporates were over 60% utilities. There were no broad-based indices. Fixed income derivatives did not really exist.
We all know the capital-market history of the past quarter century. Just imagine having the flexibility to master the rate levitations of the 1970s, the electric credit shocks, the evolution of mortgage-backed securities and asset-backed securities, the proper application of financial futures, the use of high-yield, non-dollar, and emerging-market debt.
Also, imagine the management problem. Few would be capable of adjusting to such a stunning increase in enterprise scope.
Unquestionably, Bill has been a "manager for all seasons."
The unparalleled performance of Bill and his team were a function of their investment philosophy, which best can be characterized as a blend of "secular dynamics" and rigorous analysis.
By secular dynamics, PIMCO has always emphasized a 3-5 year focus on secular political, economic, demographic, and market sector trends. Using this methodology, we know that PIMCO was an artful dodger and then user of nuclear electric utilities in the 1980s. Six years ago this very month, when many U.S. commercial banks were trading in the bond market as if the U.S. were on the precipice of returning to a barter economy, PIMCO was the biggest buyer. And when U.S. natural gas pipelines were dislocated in 1992, PIMCO again jumped
correctly into this market.
Through the years, PIMCO also has avoided extreme duration stands, has developed rigorous volatility analysis, and been a pioneer in the expert use of financial futures.
Bill often has been characterized as the Peter Lynch of the bond markets. But based on his longevity (2.5 times Mr. Lynch) and the size of his assets under management (nearly 5 times the Magellan fund), it would be more appropriate to characterize Peter Lynch as the Bill Gross of the equity markets.
Today, all of us owe a tremendous intellectual and career debt to the late Fischer Black and to Bill Gross. Many have tried to emulate Bill's success. Through their efforts, the global fixed-income capital markets have become more efficient and more receptive to innovation. With pioneers like Fischer and Bill, would the current MBS marketplace exist in its present form? Would U.S. and soon non-U.S. investors be as dedicated to total-return maximization? Would total return investors have been so keen to push into non-dollar, emerging markets, and high-yield asset classes? Thinking of my own firm, would a Lehman or the other index providers have been so keen to fund and to add indices without keen demand from an ever-growing cadre of total return managers.
In professional sports, induction into the "Hall of Fame" implies retirement. Fortunately, this is not the case for Bill with the FIASI "Hall of Fame" award. At current asset accumulation growth rates, PIMCO has a good chance of climbing above $1.0 trillion before Bill's 65th birthday. And we all look forward to the many more articles. In fact, Bill has a book coming out from Random House in 1997, titled, EVERYTHING YOU'VE HEARD ABOUT INVESTING IS WRONG. Of course, Bill has agreed his title specifically excludes all sell-side research. Somehow, I suspect Bill's treatise will get a wider read than some of the anthologies published
by Mr. Fabozzi.
Bill still has so much to teach all of us about the global capital markets. But speaking on behalf of the many Street firm representatives here today, we sincerely hope that some of your future tutorials are a bit less expensive for us.
Bill, on behalf of the Fixed Income Analysts Society, it is my great pleasure to present you with this Tiffany's crystal, symbolic of our tremendous respect for your great achievements and for you personally, and to induct you as our third member of the Fixed Income Analysts Society's Hall of Fame. Best of all, we are also pleased to report your permanent induction into our Society, with the annual dues waived. But you will still have to pay if you come to one of our regular luncheons.
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