Bill Gross warns to hold cash against forced selling
Bill Gross joined the growing ranks of money managers expressing concern that a decline in liquidity could exacerbate losses for fund investors during a market decline.
While legislation after the 2008 financial crisis has made banks safer, the risk has merely been transferred to investment funds that function as a "shadow banking system", he wrote in an investment outlook for Janus Capital Group.
Investors should hold enough cash to avoid having to sell fund holdings during a panic.
"Long used to the inevitability of capital gains, investors and markets have not been tested during a stretch of time when prices go down," Gross wrote in the outlook.
"It's then that liquidity will be tested."
Gross, the manager of the $1.5bn Janus Global Unconstrained Bond Fund, joins money managers including BlackRock Inc chief executive officer Larry Fink, who warned that the retreat of banks as counterparties could create severe volatility.
Regulators are looking to ensure that a sudden stampede out of funds won't result in a downward price spiral that threatens the financial system. A destabilising event could precipitate a wave of selling that could feed on itself, Gross wrote.
Possible triggers for a selloff could include a deterioration in Greece, which could lead to concerns about other European countries; monetary policy steps that drive bond prices lower and the dollar higher; and a crisis in emerging markets or China.
Gross (71) was chief investment officer at Pacific Investment Management Co (PIMCO) until his sudden departure in September, when he joined Denver-based Janus.