By Sam Forgione and Jennifer Ablan
NEW YORK (Reuters) - Bill Gross, manager of the world's largest bond fund, said on Wednesday that the Federal Reserve's aggressive monetary policies may have changed the landscape so greatly that investors like himself and Warren Buffett may face radically new challenges in trying to maintain their track records.
Gross, who oversees the $288 billion PIMCO Total Return Fund and is co-chief investment officer of its parent company, Pacific Investment Management Co., said the aggressive monetary policies of the Fed as well as other longer-term structural shifts in demographics, geopolitics, and/or commodity supplies could make life harder for investors.
In his April letter posted on PIMCO's website, entitled "A Man in the Mirror," Gross said that since the early 1970s when credit began its "incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of 'greatness.'"
"What if perpetual credit expansion and its fertilization of asset prices and returns are substantially altered?" Gross asked. "What if zero-bound interest rates define the end of a total return epoch that began in the 1970s, accelerated in 1981 and has come to a mathematical dead-end for bonds in 2012/2013 and commonsensically for other conjoined asset classes as well?"
Such a scenario could potentially cause asset prices to decline instead of rise, Gross said, who is often referred to as the "Bond king." He helps oversee more than $2 trillion in assets at PIMCO.
Gross previously has said that the Fed's monthly purchases of $85 billion in Treasuries and agency mortgage securities have propped up assets on just about everything, including stocks and bonds, resulting in their being overpriced. To keep performance high, some managers have gone beyond their comfort zones and expertise, taking on too much risk.
"What if there is a future that demands that an investor - a seemingly great investor - change course, or at least learn new tricks? Ah, now, that would be a test of greatness: the ability to adapt to a new epoch," he said on Wednesday.
"There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne," Gross said.
"All of us, even the old guys like Buffett, Soros, Fuss, yeah - me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience," he said, referring to investors George Soros and Dan Fuss.
Gross admitted that his measured risk-taking method did not work well for a few months in 2011 when he underestimated the contagion effect from the European debt crisis and the U.S. debt ceiling budget battle. That year, he bet against U.S. Treasuries, which were one of the biggest outperformers of 2011.
Gross on Wednesday said of his risk exposure: "It didn't work too well for a few months in 2011, nor in selected years over the past four decades, but because credit was almost always expanding, almost always fertilizing capitalism with its risk-taking bias, then PIMCO prospered as well."
In 2012, Gross made a huge comeback with his prescient bets on mortgage-backed securities. The Total Return fund posted returns of 10.36 percent, more than double that of the benchmark Barclays U.S. Aggregate Bond Index.
Gross, on Wednesday, said: "Investors should be judged on their ability to adapt to different epochs, not cycles."
(Reporting by Sam Forgione and Jennifer Ablan; Editing by David Gaffen and Leslie Adler)