Why Are Bond Managers Weird?

It’s an old saw in asset management: Stock pickers are optimists. Their picks, after all, have unlimited potential to rise on a good story — and thus enthusiasm and optimism are the default mien. Bond managers, on the other hand, are always looking at things to go belly-up, cultivating an emotional (and financial) protection against the downside.

Bonds, of course, earn a certain interest rate annually — but unlike stocks, their upside is capped, while still keeping open the possibility of losing everything if the issuing company, or government, goes south.

Perhaps bond managers have developed a sense of humor to deal with it all.

Take Bill Gross. Gross, now at Janus Capital, pioneered active management over a 40-year career at Pacific Investment Management Co. His monthly outlook letters are highly anticipated for their market insights, but Gross also has a way of mixing funny personal anecdotes with real economic lessons.

In August of last year, Gross somehow deftly got from the theoretical importance of dealing candidly with kids’ questions about sex, test-tube babies, and Victoria’s Secret catalogs to honestly addressing investors’ questions about the economy and financial markets. In response to his son’s question about the lingerie mailer, only Bill Gross would ask himself this: “Well now . . . does he mean what is Victoria’s Secret or what is Victoria’s Secret?” (emphasis is Gross’s).

It’s not helpful, he went on, to tell kids that kittens come from the pet store (his own mother’s answer to the age-old question on the provenance of babies). It’s also not honest to tell investors that policies like quantitative easing will end well, Gross wrote. Okay, not laugh-out-loud funny ­ but better than your standard market outlook.

Then there’s Daniel Fuss, co–portfolio manager of the flagship Loomis Sayles Bond Fund. Fuss is legendary when it comes to managing bonds. He is equally as famed for his storytelling, as well as his promises to everyone at Loomis, Sayles that he’ll work as the firm’s office greeter if he ever loses his sharpness.

If you give the 83-year-old Milwaukee native enough time, he’ll detail the lessons about risk that he learned in the Navy and now applies to bond investing. The former signal officer explained to Institutional Investor in 2012 about diversification and aircraft carriers: Aboard the carriers were plenty of different types of aircraft, “but I always kept in mind that you had to make sure the carrier didn’t sink, in which case diversification” would clearly be useless. After laughing, he instructed the waiter to add extra bacon to his salad, while assuring the author that he would tell his wife, Rosemary, he had eaten only grilled asparagus for lunch. Fuss is funny in a Prairie Home Companion kind of way.

Maybe bond managers just work harder to be clever and funny. They’re heavy on degrees in math and engineering, tasked with divining the will of the Federal Reserve, the inflation rate, and other financial minutiae. Sanity demands adding a little cheer to the mix — otherwise market outlooks on, for example, rising yields would be just as likely to put readers to sleep as to inform them.

One manager holding no risk of boredom is Jeffrey Gundlach, co-founder of DoubleLine Capital. Last year the controversial investor shared the stage with James Grant of Grant’s Interest Rate Observer to talk about Donald Trump, monetary policy, and debt. Speaking to a room packed with advisers and investors, Gundlach likened people’s impatience with investments (his advice: choose wisely, and put them in a closet for a few years) to people desperately watering dying post-Christmas poinsettias (do nothing, cut the plants back to within an inch of their lives, and put them in a closet for a few months).

Sometimes, of course, bond managers are not funny. It’s the fixed-income markets that clue investors that there may be cracks in an otherwise sunny future predicted by stocks. In early 2008 the bond markets warned of danger even as stocks partied on until September. Last month Treasury markets were sending signals that the Trump equities rally may be overplayed.

It’s hard not to be a crank when your role is to be Cassandra. “Our highly levered financial system is like a truckload of nitroglycerin on a bumpy road,” cautioned Gross in his most recent outlook. “One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault.”

And cranks aren’t always funny.