Pimco still riding 'central-bank wave'

It's time to take some risk off the table in anticipation of the day when central banks stop supporting asset prices and economies have to stand on their own, according to Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co. LLC. “It still makes sense to ride the central bank wave,” Mr. El-Erian said Thursday at the Altegris Strategic Investment Conference in Carlsbad, Calif. But Pimco is “slowly de-risking, because the longer this wave goes, the bigger the risk.” Mr. El-Erian was hesitant to give specifics about where Pimco is pulling back, but said the asset manager is reducing “credit and equity beta in things that have done extremely well, and are priced to perfection,” that involve banks' capital structure, high-yield offerings that have done well and gold-related investments. Pimco has told its managers to think about “being more defensive, and much more selective when becoming offensive,” he added. Opportunities still exist where “central bank liquidity doesn't get to,” such as small-company debt and certain currency trades, Mr. El-Erian said. “Whether we like it or not … beta is not going to be there,” he said. “Alpha is going to have to do a lot more heavy lifting.” Pimco's “new normal” thesis of sluggish developed-country growth and persistently high unemployment is still in place, he said. Yet investors have benefited from an “artificial world” of record high stock prices. “Clients are excited and anxious. They've made money, but feel there is some threat out there,” he said. “It's been an unloved rally.” That's not surprising, given questions about central banks' role in propping up asset prices and concerns about what will happen when they pull back. “The question is, what will the [central bank] handoff look like and when will it happen?” Mr. El-Erian said. “You could get a handoff to real [economic] growth. But there could also be structural problems that inhibit growth” from taking off.