PIMCO published Bill Gross’ April “Investment Outlook” titled “The Great Escape” where he theorizes how one can generate returns in a low yield environment. Given a delivering market, he asks, “What assets have the potential to deliver the most return with the least amount of risk and highest information ratios?” In his opinion:
- Real assets – commodities, land, buildings, machines and knowledge in an educated labour force
- Financial assets with shorter spread and interest rate durations as they are more defensive
- Financial assets for entities with relatively strong balance sheets that are exposed to higher real growth, specifically in developing nations
- Financial or real assets that benefit from favorable monetary and fiscal policy thrusts
- Financial or real assets which are not burdened by excessive debt and subject to future haircuts.
In simpler terms: For bonds, he favors high quality, short duration and inflation protected assets. For stocks, he favors developing versus developed markets. He also favors shorter duration here, selecting dividend paying as opposed to growth stocks. For commodities he likes inflation sensitive, supply constrained products and in general he says to be wary of levered hedge strategies that promise double-digit returns that are difficult in a delivering world.