Think the unfolding drama at Pimco can't affect your clients' portfolios? Think again.
In the world of portfolio crash-testing analysis, no company is an island. In other words, even if you're not directly exposed to funds managed by Pacific Investment Management Co., you could feel the pinch if the troubles at Pimco start to impact its parent company, Allianz SE.
Pimco, which manages nearly $2 trillion, represents 30% of Allianz revenues. And, according to portfolio crash-testing analysis, an 11% drop in Allianz's stock could pull down the S&P 500 Index by 5.8%.
If Allianz shares fell by 22%, the S&P could by drop by more than 13%.
The Barclays Aggregate Bond Index, meanwhile, would be expected to rise by 0.3% on an 11% Allianz drop and go up 1.9% on a 22% Allianz drop.
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In the world of quantitative portfolio crash testing, each security has a set of betas to unique factors such as market variable, style and growth variables, and liquidity.
Daniel Satchkov, president of RiXtrema Inc., explains that Allianz can represent a custom variable in the equation and any shocks to that variable can be calculated to forecast broader market effects.
Last week when Morningstar lowered its stewardship grade for Pimco in light the highly published management turmoil, Mr. Satchkov was able to easily calculate some broader market scenarios.
“We're looking at a situation at Pimco where if it's not too drastic there could be no major impact to the markets, but what if Morningstar really saw something inside the company that has the potential to degenerate into a full blown explosion?” he said. “If that's the case, we can easily conclude that Allianz stock price would suffer, and we can also calculate what will happen to different portfolios if that happens.”
Thus, depending on your outlook for what appears to increased internal strife at Pimco, there might be some increased downside risk in the making.