From asset outflows and restructuring of the investment committee to the evolving role of regulators in attempting to protect investors, Pimco's top-level executives shared the inside scoop on their asset management firm Friday morning in Chicago at the Morningstar Inc. annual investment conference.
Since Pimco co-founder Bill Gross' sudden departure nine months ago, chief executive Douglas Hodge said that they have adapted, and described Mr. Gross as an “iconic investor.”
“In many respects, we owe [Mr. Gross] the accolades he has received,” Mr. Hodge said in response to a direct question about the state of Pimco in the wake of Mr. Gross' decision to leave for Janus
Capital Group.
“We have instituted programs designed to retain talent,” Mr. Hodge said. “Most importantly, we have delivered performance, and today the narrative is back to where it has always been at Pimco.”
Daniel Ivascyn, who took over as chief investment officer when Mr. Gross left, reiterated that, for an asset manager, it is all about performance.
“We have added several resources, and we have over 250 portfolio managers around the globe, and the team is functioning quite well,” he said. “On the portfolio manager side, the culture is based on investment performance.
“We aren't going to accept underperformance, so ultimately if you don't perform, [then] you won't have a home at Pimco.”
Having watched the firm's total assets under management slide from a peak of $2.1 trillion in April 2013 to $1.7 trillion today, Mr. Hodge acknowledged that “change creates anxiety, but we have addressed some of the organizational concerns.
“As the anxiety diminishes the money starts to flow back,” he said.
Mr. Hodge added that the money will “not necessarily flow into” the flagship Pimco Total Return Fund, “because we live in a world of low rates and flat yield curves.
“Right now we're seeing people crowd into the front end of the yield curve with more of an income orientation,” he said. “We've been responding to the demand for yield with, I think, some success.”
In terms of the $107 billion Pimco Total Return Fund (PTTAX), which is down from $222 billion when Mr. Gross left the firm, Mr. Ivascyn said “there will be a time when the merits of core bonds returns, and we are in no way turning our back on that strategy.”
Following one of the recurring themes of this year's conference, both Pimco execs expressed their support for the future of actively managed funds.
“We're reaching an inflection point, whether the Fed moves in September, December or early next year, it will be the first time the Fed has raised rates in nine years,” Mr. Hodge said. “It's not the role of the Fed and regulators to protect investors from losses — that's our job.”
Mr. Ivascyn described the financial markets as “now dominated by central bank decisions.
“There will be continued volatility and dislocation, and that's a perfect environment for active management,” he said.
Asked about the support of Pimco parent Allianz SE in the wake of outflows following the sudden departure of Mr. Gross and, before that, former chief executive and co-chief investment officer Mohamed El-Erian, Mr. Hodge said that the relationship is solid.
“We've been part of the Allianz group for 15 years, and we have delivered financial results in double-digit global income,” he said. “In 2000, we represented 4% of Allianz's global income, and we are now 18% to 20% of their global income.
“We complement Allianz quite well, and they have been a supportive partner,” he said.
Going forward, Mr. Hodge said that Pimco's main areas of focus include addressing global demand for income, positioning core bond portfolios for a steeper yield curve in the future and building out Pimco's alternative investment products.
He added a fourth focal point: equities, reminding the audience of mostly financial advisers that Pimco manages more than $50 billion in enhanced equity products.
“As all the money flows into passive strategies, this [smart beta or enhanced indexing] is a way to take a half step out of passive and earn excess returns,” he said. “We're in the equity business in a significant way.”
Building on Pimco's long-running macroeconomic theme of a new normal for the markets, Mr. Ivascyn said, “Investor expectations need to come down” to expect between 2% and 3% from bonds and mid-single-digit returns from equities.
In terms of the eventual normalizing of interest rates, the Pimco new-normal projections have been calling for something closer to 2%, as opposed to the historically normal range of 4%.
“We're not in the extreme slow-growth camp, and we think the U.S. economy will continue to grow at a pace that's relatively stronger than the rest of the world, and the dollar will continue to strengthen,” Mr. Ivascyn said.
“We do think rates are going higher, and we're underweight duration, but our outlook for slow growth and moderate inflation is over a three-year period,” he said. “We think the U.S. economy over the coming year will grow by between 2.5% and 3%.”
