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Bill Gross, Larry Fink talk economy, jobs and the markets

Fink

Want to know more about the bond barons featured in Sunday's edition of The Los Angeles Times?

Bloomberg TV is airing tonight an hour-long interview with BlackRock CEO Larry Fink and Pimco co-founder Bill Gross, in which the two financial titans discuss the global economy, job creation and even the Occupy Wall Street protests. (The financial news channel also has online video here and here.) 

Gross and Fink, who both grew up in California and attended UCLA, have often found themselves at opposite viewpoints on the economy. Both are fretting that economic growth in developed countries could be weighed down for years by debt problems in Europe and high unemployment in the U.S. Gross is more bearish about the future, while Fink says in the interview that he's more optimistic because of the underlying "vitality" in many of America's cutting-edge companies.

Related:

The rise of the bond barons

Dow falls to five-week low as global gloom deepens

-- Joe Bel Bruno

Photo: Pimco co-founder Bill Gross, left, with BlackRock CEO Larry Fink. Credit: Bloomberg

 

Jon B. Lovelace, who led American Funds group, dies at 84

Jon B. Lovelace, long-time head of the Los Angeles-based American Funds mutual fund company, has died. He was 84.

His family said Lovelace died of natural causes at his home in Santa Barbara on Wednesday.

Lovelace is credited with some of the key innovations that helped set the stage for American Funds' explosive growth from the 1980s through the mid-2000s, as it became synonymous with successful buy-and-hold stock investing.

LovelaceThe funds' parent firm, Capital Group Cos., now manages about $1.2 trillion in all, most of that in 33 mutual funds owned by tens of millions of Americans. The company’s huge flagship funds include Growth Fund of America and Investment Co. of America.

Lovelace also nurtured an egalitarian environment at Capital, the polar opposite of the authoritarian regimes of many Wall Street firms.

His daughter, Carey, once referred to him as a “Buddhist businessman” who disdained hierarchy and personal aggrandizement.

Although Lovelace ultimately held the title of chairman of Capital's fund business until he retired in 2005, “he liked the symbolism of not having titles,” said Paul Haaga Jr., a Capital executive who joined the firm in 1985. “He led quietly, and he led through influence.”

In 1958, Lovelace launched a new approach to mutual fund management: Rather than having a single individual manage a portfolio, Lovelace created a “multiple counselor” system, whereby four or more managers would independently run slices of a fund.

It fit with Lovelace's dislike of the traditional Wall Street “star” system. “Because of the nature of our structure, we're not highly dependent on one person as some organizations are,” Lovelace told The Times in 1990.

The multiple-counselor system produced powerful long-term investment returns on many of American's stock funds, which in turn made the company a favorite of brokerages eager to sell winning products.

Go here for Lovelace’s full obituary in The Times.

-- Tom Petruno

Photo: Jon B. Lovelace. Credit: Capital Group Cos.

 

Use of 'target-date' funds grows in 401(k) plans

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There is a bit of good news in the world of retirement investing.

According to a new study, Americans are increasing their use of so-called target-date mutual funds in 401(k) plans, and most people report being satisfied with them.

Among active and knowledgeable investors, use of target funds has nearly doubled to 41% today from 22% in 2005, according to the survey of more than 1,000 people by investment firm AllianceBernstein.

Among neophytes -- what the firm terms "accidental" investors, who handle their own 401(k) investing only because they must -- 1 in 4 people use target funds, up from 16%.

Target funds typically buy a variety of underlying mutual funds to create a diversified portfolio based primarily on a person's age and expected retirement date. Though target funds have shortcomings and risks, they're generally considered to be a wise choice for unsophisticated 401(k) investors because they handle much of the decision-making, such as which individual funds to buy and how much.

Employees seem to be happy with target funds: 81% of those surveyed said they're as satisfied or more so with them as with the other funds in their plans. Most people understood that the funds are designed to become more conservative as participants near retirement age, according to AllianceBernstein.

Still, Americans feel disillusioned overall about their retirement prospects.

The percentage of people who feel confident in their ability to achieve a comfortable retirement has risen to 26% from 18% in 2009, according to the survey. but that's down from 41% in 2007, prior to the global financial crisis. And even then, only 2 in 5 people feeling upbeat about their retirement prospects was nothing to crow about.

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Bill would remove penalty for tapping 401(k) to avoid foreclosure

Solo 401(k) lets self-employed shelter more of their income

401(k) 'education' by provider may be a sales pitch

-- Walter Hamilton

Photo credit: Mark Boster/Los Angeles Times

California boosts yields on muni bond sale to lure investors

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California was forced to boost interest rates on a sale of $1.8 billion in tax-free muni bonds Wednesday, as institutional investors demanded higher yields to close the deal.

The state set a yield of 3.70% on the 10-year bonds in the offering, up from a preliminary estimate of 3.51% on Monday. The five-year bonds in the sale will pay a yield of 2.28%, up from an initial estimate of 2.10%. The bonds were sold in maturities of three to 30 years, with the longest-term issue yielding 5.03%.

Interest on the bonds is exempt from state and federal income taxes for California residents. The proceeds from the sale will fund voter-approved infrastructure projects.

Treasurer Bill Lockyer had to pay higher yields after the bonds got a lukewarm reception from individual investors Monday and Tuesday. Those investors put in orders for $387 million of the debt, or about 21.5% of the total.

By contrast, individual investors ordered almost 28% of the $2.37-billion bond offering the state sold Sept. 20. And at the sale before that, in November, individuals sought nearly 80% of the deal -- when yields were substantially higher. The 10-year bonds in that offering paid 4.23%.

The relatively low demand from individuals this time around meant that institutional investors, such as mutual funds, had more leverage to push for higher returns when the state took their orders Wednesday. That will benefit individuals who ordered the bonds Monday and Tuesday, because all buyers get the same final yields.

It also means taxpayers will foot a bigger bill for interest costs than Lockyer had hoped.

Some muni bond market analysts say individual investors balked at the offering because they’re unhappy with the relatively low interest rates on tax-free bonds in general, even though yields have risen over the last few weeks.

“Retail investors are deeply ambivalent about bonds at these yields,” said Matt Fabian, an analyst at research firm Municipal Market Advisors in Concord, Mass.

Interest rates on high-quality bonds have dropped across the board this year as the Federal Reserve has tried to put more downward pressure on all rates to help the economy.

The tax exemption on muni bonds means their returns are more attractive than yields on many taxable securities. A five-year U.S. T-note pays just 1.04%, and that interest is federally taxable.

Still, many investors are put off by the low nominal returns on munis compared with what they remember in recent years, said Marilyn Cohen, head of money management firm Envision Capital Management in Los Angeles.

“Given the market we confronted, we’re satisfied with the results,” said Tom Dresslar, a spokesman for Lockyer in Sacramento. “We’re confident we got the best deal possible for taxpayers.”

Besides the $1.8 billion in tax-free bonds, the state also sold $205 million in shorter-term taxable bonds Wednesday.

RELATED:

California plans $2-billion bond sale amid rising yields

California sells out $5.4-billion short-term note sale

California sells $2.4 billion in bonds as yields fall

Investing: Is the bond market at a crossroads?

-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

Photo credit: Makaristos

Individual investors' orders stay light in California bond sale

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Demand from individual investors remained on the light side Tuesday as California wrapped up the second day of a large bond offering to fund infrastructure projects.

Treasurer Bill Lockyer said the state’s brokerage network took in an additional $137 million in orders from individuals for the offering of $1.8 billion in tax-free muni bonds. On Monday the state got $250 million in orders. The two-day total of $387 million was about 21.5% of the total deal.

That was significantly less than the $655 million that individual investors ordered at the state’s last bond offering, on Sept. 20. That total was almost 28% of the $2.37-billion deal.

Lockyer got a better response to an offering of $200 million in shorter-term taxable bonds Tuesday. Individual investors ordered about 43% of those issues.

The state will complete the bond sale Wednesday, when institutional investors such as mutual funds will bid for the remaining securities and final yields on the bonds will be set.

The tax-free bonds -- the interest paid is exempt from state and federal income tax for California residents -- got a lukewarm reception from individual investors even though the state was offering higher interest rates than at the September sale.

As bond yields in general have rebounded over the last month, the state was offering a preliminary yield of 2.10% on the five-year bonds in its latest sale, up from 1.61% in the September deal. The 10-year bonds in this sale were offered at a preliminary yield of 3.51%, up from 3.17% at the last sale.

The bonds, known as general obligation issues, are being sold in maturities of three to 30 years. The tax exemption means the yields on the bonds can be worth substantially more than similar fully taxable yields, depending on an investor’s tax bracket.

California always prefers to get substantial orders from individual investors in debt deals. That lessens the chance that institutional investors will be able to use their clout to demand higher yields when they bid for whatever’s left. (Individual investors get whatever the final yields turn out to be.)

Some muni bond market analysts say individual investors are unhappy with the relatively low interest rates on tax-free bonds, even though yields have risen over the last few weeks.

"Given overall market conditions we're satisfied with the outcome," said Tom Dresslar, a spokesman for Lockyer in Sacramento.

Proceeds from the securities will finance a backlog of voter-approved infrastructure projects.

This week’s sale will be California’s last general-obligation bond offering of 2011.

RELATED:

California plans $2-billion bond sale amid rising yields

California sells out $5.4-billion short-term note sale

California sells $2.4 billion in bonds as yields fall

Investing: Is the bond market at a crossroads?

-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

 

Bill Gross apologizes to Pimco fund owners for 'bad year'

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Bond guru Bill Gross is offering a big mea culpa to disappointed shareholders of his Pimco Total Return Bond fund, which is suffering through a bout of terrible performance.

In a “special edition” of his monthly investment outlook, Newport Beach-based Gross concedes that he’s “having a bad year. . . . Pimco’s centerfielder has lost a few fly balls in the sun.”

The $240-billion fund, the world’s largest bond portfolio, is up only about 1% year to date, ranking it in the bottom 20% of performance among its peers, according to Bloomberg News data. By contrast, the fund's 7.8% average annualized return over the last five years ranks it in the top 4% of bond portfolios.

Gross, 67, made a major (and well-publicized) tactical error in the first half of the year by avoiding U.S. Treasury securities, asserting that they didn’t pay enough to make them worth holding.

But the world continued to flock to Treasuries, pushing bond prices up and yields lower. Then, when panic struck markets in late July over Europe’s government-debt crisis and renewed fear of a global recession, the rush into Treasuries became a stampede.

Meanwhile, risk-averse investors suddenly dumped some of the bond sectors that Gross had favored, including emerging-market debt.

Gross writes in his letter, which the website Dealbreaker posted earlier Friday:

The simple fact is that the portfolio at midyear was positioned for what we call a “New Normal” developed world economy -- 2% real growth and 2% inflation. When growth estimates quickly changed it was obvious that I had misjudged the fly ball: E-CF or for nonbaseball aficionados -- error centerfield.

In the last two months Gross has shifted gears, boosting his Treasury holdings on the assumption that interest rates may stay low for some time because of a weak global economy. But the market turned on Gross yet again, as Treasury yields have rebounded in recent weeks. His fund is down 2.2% over the last month, making it one of the worst-performing bond funds in that period.

Gross, who loves to use metaphors in his commentaries, seeks to assure shareholders that he’s trying to get back on track:

There is no “quit” in me or anyone else on the Pimco premises. The early morning and even midnight hours have gone up, not down, to match the increasing complexity of the global financial markets. The competitive fire burns even hotter. I/we respect our competition but we want to squash them each and every day. . . .

Yet even so, can the golden glove regain its magic? Well, as I’ve indicated, we’re showing up early every day at the ballpark -- in this case for a little fielding practice. And perhaps importantly, we recognize the majesty of the stadium we’re playing in. This is big league ball, where your ticketholders come to the park expecting not a circus Willie Mays catch but more wins than losses and a yearend performance that places your bond assets near the top of the standings.

RELATED:

California plans $2-billion bond sale amid rising yields

Mortgage rates under 4% are becoming harder to find

Dow and Nasdaq turn positive for the year as stocks keep rallying

-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

Photo: Pimco's Bill Gross. Credit: Tim Boyle / Bloomberg News

California sells $2.4 billion of bonds amid falling yields

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California on Tuesday wrapped up its first long-term debt sale of 2011, paying interest rates substantially below what it paid on bonds last November -- a savings for taxpayers.

The drop in yields curbed demand for the bonds from individual investors, but buying by institutional investors such as mutual funds allowed Treasurer Bill Lockyer to issue nearly the full amount planned.

The state said it sold $2.37 billion of tax-free general obligation bonds to refinance previously issued bonds and pay off other debt.

Individual investors put in orders for $655 million of the bonds on Friday and Monday. Institutions bought $1.74 billion of the deal on Tuesday.

When it issued bonds in November the state paid an annualized tax-free yield of 4.23% on 10-year securities in that offering. This time Lockyer set the yield on 10-year bonds at 3.17%, more than a full point less. Yields were lower across the board on bonds of other maturities as well.

Lockyer Although California’s credit rating remains the lowest of any state, the budget passed by the Legislature in June has given investors more comfort about the state’s fiscal outlook, Lockyer spokesman Tom Dresslar said. “We believe the budget has helped constrain the price” of borrowing, he said.

Credit rating firm Standard & Poor's in early July raised its outlook for the state’s rating to “stable” from “negative,” saying the state's plan to balance its budget was "largely realistic."

It also has helped California that muni bond interest rates in general have tumbled this year, along with yields on U.S. Treasury bonds, as the economy has weakened and many investors have favored bonds over stocks for safety. The 10-year Treasury note yield was at 1.94% on Tuesday, down from 3.30% at the start of the year.

But falling yields have pushed some individual investors to the sidelines because they believe the returns aren’t high enough to justify the risk, analysts say. Small investors are “deeply unhappy” with muni yields now, said Matt Fabian, analyst at research firm Municipal Market Advisors.

Orders from individual investors in Tuesday’s California bond sale were well below the nearly $1 billion they put in for the November sale, although this time around bonds of certain maturities were available only to institutions. The state said it raised yields on bonds maturing between 2013-2016 and 2022-2028 by as much as 0.05 percentage points from its initial estimates to get the deal done.

With the steep drop in muni yields this year “the market is not very conducive to doing a bang-up retail business,” Dresslar said. Still, he said, the state was “very pleased” with the demand it saw.

The state plans another general obligation bond sale in mid-October, although the amount hasn’t been determined, Dresslar said.

Some investors may be shying away from muni bonds because of President Obama’s proposal to limit the amount of muni bond interest that high-earners can exclude from their taxable income beginning in 2013. The proposal would help pay for the economic-stimulus program in the jobs bill Obama sent to Congress earlier this month.

But Congress could quash the idea. Lockyer and other state officials already have raised objections, warning that the move could mean investors would demand higher yields on muni bonds, driving up state and local governments' cost of issuing debt.

RELATED:

California sells out $5.4-billion short-term note sale

Muni bond market was a big winner as stocks dived

Fed expected to launch new program to push long-term interest rates lower

-- Tom Petruno

Inset photo: Treasurer Bill Lockyer. Credit: Armando Arorizo/Bloomberg News

California muni bond deal sees light demand from individual investors

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A steep drop in interest rates on tax-free municipal bonds this year has curbed individual investors’ appetite for a new California debt offering.

The state’s brokerage network took in orders Friday and Monday for $640 million of a $2.5-billion general obligation bond deal offered by Treasurer Bill Lockyer, his office said late Monday.

By contrast, individual investors put in orders for nearly $1 billion of bonds at the last such offering, in November.

The difference between then and now: Market yields on California muni bonds have fallen sharply, pulled down by the slide in U.S. Treasury bond interest rates this year and by the relative calm in the muni market after a major sell-off last fall and winter fueled a spike in yields.

When it issued bonds in November the state paid an annualized tax-free yield of 4.23% on 10-year securities in the offering. This time around the state set the preliminary yield on its 10-year bonds at 3.17%, more than a full percentage point less.

The state is offering 4.80% on the 30-year bonds in this week’s deal, down from 5.50% on 30-year bonds it sold in November.

The decline in rates is good news for taxpayers who will foot the bill for the bonds, which will refinance previously issued debt. But individual investors “are very wary of these yields being so low,” said Joe Lee, a muni trader at bond firm De La Rosa & Co. in L.A.

Because of its protracted budget woes, California has the lowest bond ratings of any state, at A1 from Moody’s Investors Service (tied for last place with Illinois) and A- from Standard & Poor’s.

The relatively light demand from individual investors means the state is more dependent on institutional investors, such as mutual funds, to buy the bonds. Those investors will put in orders on Tuesday, which is when final yields on the securities will be set.

Some investors may be shying away from muni bonds because of President Obama’s proposal to limit the amount of muni bond interest that high-earners can exclude from their taxable income beginning in 2013. The proposal would help pay for the economic-stimulus program in the jobs bill Obama sent to Congress earlier this month.

It’s not at all certain that Congress will agree to limit the muni tax exemption. Lockyer and other state officials already have raised objections, warning that the move could mean investors would demand higher yields on muni bonds, driving up state and local governments' cost of issuing debt.

RELATED:

California sells out $5.4-billion short-term note sale

Muni bond market was a big winner as stocks dived

Fed expected to launch new program to push long-term interest rates lower

-- Tom Petruno

Photo credit: Makaristos

 

TCW vs. Gundlach trial: How the jurors saw it

Gundlachmstar
Star bond fund manager Jeffrey Gundlach may not have made any new friends among the jurors who  decided his legal battle with his employer of 24 years, TCW Group Inc.

But despite his legendary ego, he didn't make enough enemies on the panel to give TCW the big win it sought in the case.

The six-week trial wrapped up Friday as the jury in Los Angeles County Superior Court returned decisions on 37 separate questions at issue in the case.

For the most part, the jury of five women and seven men agreed with TCW, which fired Gundlach in December 2009, then sued him a month later. Gundlach, TCW said, was secretly plotting to form a rival company, and in the process was guilty of breaching his fiduciary duties to TCW, conspiring against it, misappropriating the company's trade secrets and, after he was ousted, interfering with with TCW's relations with its clients.

All true, the jury decided. Yet they opted against awarding TCW the hundreds of millions of dollars in damages it sought. In fact, they awarded nothing to the firm, which manages about $120 billion for clients.

In interviews after they rendered their verdicts, some jurors said they believed Gundlach's side of the story, which was that TCW in summer 2009 had hatched its own plot to fire him as a cost-saving measure, and because he had become openly antagonistic toward the company and its parent firm, French banking titan Societe Generale.

"It looked as if they were just waiting for a cause -- they were going to hack him anyway," said juror Glen Abraham, a 56-year-old MTA employee from Sunland.

Another juror, 30-year-old singer-songwriter Kristy Hanson, said that even if TCW hadn't discovered Gundlach's apparent plans to form a new business, DoubleLine Capital, "We weren't entirely convinced that he would not have been fired anyway."

Although TCW saw billions of dollars in client assets leave after Gundlach was ousted, that damage was "self-inflicted" by the decision to get rid of him, Hanson said. Hence, the jury didn't have much sympathy for TCW on the question of recovering alleged damages.

Continue reading »

Jury renders split decision in TCW-Jeffrey Gundlach case [Updated]

Gundlach-blog

Star bond fund manager Jeffrey Gundlach was found liable Friday for breaching his fiduciary duty to his former employer, asset management giant TCW Group Inc., which fired him in December 2009.

But in what essentially can be viewed as a win for Gundlach, a Los Angeles jury found no harm to TCW in that breach and awarded the firm no financial compensation.  

Further, the  jury found that TCW must pay $66.7 million to Gundlach and his three co-defendants for failure to pay wages owed them before leaving the money-management firm to set up a rival company in 2009.

[Updated at 9:51 a.m.: After the jury was dismissed, a smiling Gundlach was asked how he felt about the decision. "Great," he said. "It's 67-to-zero," he added, referring to the wages owed to him and his co-defendants.

[TCW's general counsel, Michael Cahill, said in a statement that the firm was "gratified by the jury's verdict, which speaks directly to the principles at the heart of this case -- integrity, honesty and trust."]

On a separate issue, the jury of five women and seven men agreed with TCW’s claim that Gundlach had misappropriated the company’s trade secrets in setting up a rival firm in 2009, causing harm to TCW. Any damages on that claim will be decided by Judge Carl J. West. TCW is asking for $89 million.

The verdicts were read in a packed courtroom, with Gundlach and many of TCW’s top officers present. The six-week civil trial in Los Angeles County Superior Court had wrapped up on Tuesday afternoon. Jurors took just two days to decide on 37 separate issues on the verdict form.

TCW, which manages about $120 billion in assets for clients, fired Gundlach in December 2009 in a shakeup that rocked the mutual-fund world. One month later the company sued Gundlach, alleging that he and key aides conspired against the firm and stole TCW proprietary information to set up a new  fund-management business, DoubleLine Capital, almost overnight.

Gundlach, 51, then countersued and accused TCW, the parent of Trust Co. of the West, of ousting him after 24 years at the firm to cheat him out of a huge chunk of promised income.

The two lawsuits were combined into one trial, which began in late July and has been closely watched on Wall Street.

The trial was an unusual airing of the financial industry's dirty laundry. Most such disputes are settled quietly to prevent potentially embarrassing or damaging information from becoming public. But in this one there was so much bad blood between the two sides that they were unable to reach an out-of-court deal.

Continue reading »

Jury in trial of TCW Group vs. Jeffrey Gundlach to deliver verdicts Friday

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Jurors have reached verdicts in the civil trial pitting L.A. investment firm TCW Group Inc. against its former star bond fund manager, Jeffrey Gundlach. The verdicts will be read Friday at 8:30 a.m. PDT in Los Angeles County Superior Court.

The jury of five women and seven men reached decisions after just two days. The six-week trial wrapped up on Tuesday afternoon, and jurors started deliberations on Wednesday morning.

Investment giant TCW, which manages about $120 billion in assets, fired Gundlach in December 2009 in a shake-up that rocked the mutual fund world. One month later the company sued Gundlach, alleging that he and key aides conspired against the firm and stole TCW proprietary information to set up a rival fund management business, DoubleLine Capital, almost overnight.

Gundlach, 51, then countersued and accused TCW of ousting him after 24 years at the firm to cheat him out of a huge chunk of promised income.

The two suits were combined into one trial, and the jury must decide on both cases. Each side is seeking hundreds of millions of dollars in damages from the other.

TCW, parent of Trust Co. of the West, also sued three of Gundlach's lieutenants -- Barbara VanEvery, Cris Santa Ana and Jeffrey Mayberry -- who in turn joined Gundlach in countersuing TCW.

RELATED:

TCW-Gundlach case goes to the jury

TCW chief defends firing Gundlach

Gundlach blames rift on TCW broken promises

-- Tom Petruno

Photo: Jeffrey Gundlach, head of DoubleLine Capital and former chief investment officer of TCW Group, on the stand last month. Credit: Reuters

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