Fixed Income

Fund manager Pimco is back

Pimco-1800
Gross (left) left Pimco. Roman and Ivascyn (right) lead the fund unit together. Source: Imago, Reuters, Pimco

Once every three months, the top brass of Pimco gather around a 25-person conference table in the center of a rather ornate-looking hall at the fund manager’s  headquarters in Newport Beach, California. The table includes a five-person advisory board featuring former central bank bigwigs like Ben Bernanke and Jean-Claude Trichet, but also three-to-four younger staff members expected to offer a fresh take on the world’s problems. Despite the sunny California location, the dress is more boardroom chic than beach-going cool.

With global markets in turmoil the past two weeks, the group’s next meeting in March should be a doozy: Their job is to set forecasts for the coming three months that will dominate the decisions made by its 250-odd portfolio managers spread around the globe. How far will interest rates rise? How strong is the euro? Where might the next crisis come from?

This top-down approach is a holdover from the days of Pimco’s founder and former chairman Bill Gross, a star investor known as the “Bond King” who left the company on some pretty bad terms about three years ago. When Bill Gross left, so did about one quarter of the fund manager’s business.

The company has been busy reinventing itself ever since. Gone is the star power era that dominated its business under him. But it’s a fine balancing act. “Pimco is still Pimco,” quipped Dan Ivascyn, the leader of the fund manager’s six investment chiefs, and the main protagonist charged with restoring Pimco’s former glory.

13 p29 PIMCO’s wild ride-01

It’s been a rough ride. Pimco was once the world’s largest bond manager, with more than $2 trillion in assets under management, but that number fell to $1.4 trillion as clients pulled out their cash following Mr. Gross’ departure (see graphic). A decent amount of those clients have since returned – Pimco now says it manages about $1.8 trillion. Of that, $400 billion is on behalf of its German parent, Allianz.

Could they climb all the way back to the $2-trillion mark? That’s tougher to say. Fixed income is a tricky business, where demand ebbs and flows with the state of the economy. Emmanuel Roman, Pimco’s co-chief, says there’s no specific target for assets. “Customers decide themselves just how much money they want to invest in fixed-income securities,” he said.

But at least Pimco is no longer giving clients a reason to leave. Miriam Sjoblom, an analyst with Morningstar, says the fund manager is set up much more broadly these days. Bill Gross’ flagship Total Return Fund at its height managed about one quarter of the company’s total assets. Now, Mr. Ivascyn’s Income Fund is the largest with only about $107 billion under management. Still, it outperforms most of its peers, just like many other Pimco funds.

The more understated reality of Pimco today is one that German owner Allianz probably doesn’t mind after its experience with Mr. Gross.

12 p30 The return of government debt-01

The bond king left overnight on September 26, 2014, leaving a hand-written note, after reportedly getting wind of Allianz’s plans to replace him as investment chief. In the months before he left, the then-70-year-old Mr. Gross had become increasingly erratic, wearing sun glasses to a key conference and making headlines with a letter to investors that focused largely on his dead cat.

It was all too much for the rather staid and serious Allianz, though the decision didn’t come cheap. The German insurer, led by Oliver Bäte, had to cobble together a $200 million bonus pool to avert a brain drain in the uncertain months after Mr. Gross’ departure. Still, Mr. Bäte chose to stay out of his subsidiary’s operating business. That’s something the company’s current leadership still gives him credit for.

Pimco may have been stabilized, but the future still has plenty of pitfalls, starting with this year’s more volatile markets. Bonds are curious things: As the US central bank continues to raise interest rates, the interest that governments pay for new debt goes up, too, making it attractive for long-term investors who value safety. But as those yields go up, demand for existing bonds (with lower yields) tends to fall. That puts fund managers like Pimco in a bit of a conundrum. American financial analysts are hotly debating right now whether the sector is about to enter a new bear market, because demand and prices for bonds are falling, or a bull market because yields are once again rising.

Mr. Ivascyn has mostly retained his calm and doesn’t see central banks as his biggest threat. “Recent market events have not meaningfully affected the real economy, and with fiscal stimulus in place, we believe the Fed will make three hikes that will take the neutral rate to the low twos by the end of 2018,” he said. The rise of passive funds linked to an index is becoming Pimco’s true nemesis.

The yield on 10-year US bonds has surged to around 2.88 percent, its highest level in four years.

Over the past few years, actively-managed funds in the bond market have consistently beaten the average returns of passive funds (Mr. Ivascyn’s Income Fund had an impressive return of 8.75 percent last year, better than 99 percent of comparable funds). The opposite has been true in the stock market, where simple exchange-traded funds often beat out fund managers who are more likely to make a risky stock bet that doesn’t pay off.

But that success could become harder to replicate as interest rates start rising again. While on the one hand it allows active funds like Pimco to tinker more by investing in shorter-term debt, it makes it harder to beat passive funds that will offer you a decent yield. Fixed-income investors could be tempted by cheaper alternatives, says Todd Rosenbluth, director of ETF and mutual fund research at investment research firm CFRA.

Those that are pessimistic include none other than Mr. Gross himself, who is now with Janus Henderson. Back in mid-January, he predicted the start of a new bear market in bonds. Speculators were preparing to drive down bond prices, he warned, which in turn would push the yield on 10-year US Treasuries up to around 2.7 percent to 2.8 percent. Four weeks later, the yield on 10-year US bonds has surged to around 2.88 percent, its highest level in four years.

Astrid Dörner is a correspondent for Handelsblatt in New York, covering the financial sector. Christopher Cermak contributed and adapted this story into English for Handelsblatt Global. To contact the author: adoerner@handelsblatt.com  

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