Pimco and T. Rowe Price warn investors it's time to reduce risk

Firms join chorus of voices urging caution in an expensive market.
AUG 09, 2017

Two of the biggest money managers have a message for investors: it's time to dial back risk. Investors should pare U.S. stocks and high-yield debt while shifting to lower-risk assets, such as Treasuries and mortgage-backed securities, according to an allocation report by Pacific Investment Management Co. "Considering asset prices generally are fully valued, we are modestly risk-off in our overall positioning," managing directors Mihir Worah and Geraldine Sundstrom wrote in the report released Wednesday. "We recognize events could still surprise to the upside, but starting valuations leave little room for error." T. Rowe Price Group Inc. echoed that view on prices as it cut the stock portion of its asset allocation portfolios to the lowest level since 2000. The Baltimore-based money manager said it also reduced its holdings of high-yield bonds and emerging market bonds for the same reason. "Everything is expensive and we are late in the business cycle," Sebastien Page, head of asset allocation at T. Rowe Price said in an interview. "That introduces fragility for risk assets and there isn't much buffer." DoubleLine, BlackRock The firms join a chorus of warnings from the biggest names in the asset management industry after the S&P 500 Index rose 16% in the past year and has reached record levels. This week DoubleLine Capital's Jeffrey Gundlach and BlackRock Inc.'s Russ Koesterich also advised investors that it's time to take risk off the table. Pimco's allocation recommendations mark a shift from the start of 2017 for the firm, which managed $1.61 trillion as of June 30. One change since February is the reduced prospect of a U.S. fiscal stimulus, such as tax reform or infrastructure spending, under President Donald Trump. "We expect that any U.S. fiscal package that passes be tilted to tax cuts, but light on reform," Mr. Worah and Mr. Sundstrom wrote. "We see limited fiscal space in Europe." In its midyear report, Newport Beach, California-based Pimco recommends underweighting equities, especially U.S. stocks, following recent rallies. The firm also advises investors to reduce high-yield debt, as defaults could climb and yield spreads could widen, while keeping exposure to better-quality credit, such as non-agency MBS likely to benefit from a healthy U.S. housing market. Pimco suggests maintaining investments in "real assets," such as inflation-linked bonds, commodities, gold and real estate investment trusts. At T. Rowe Price, the move affects $265 billion of its $904 billion under management, and only applies to asset allocation portfolios, Mr. Page said . A typical portfolio with 60% stocks and 40% bonds now holds 58% in equities. Between 2000 and 2010, the equity portion peaked at 67%, he said.

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