The old bond king's pomp no longer fits the circumstance.
The dethroned monarch, of course, is Bill Gross, the Pimco money manager known for his flamboyant public appearances, investor letters with paeans to his cat, sweeping market calls and desire to be proved right.
The madness of King Bill was accepted, even celebrated, while he helped build the California money manager during a 30-year bull market in bonds. But times change, and he was ousted from Pimco in 2014 in something of a palace coup after a prolonged internal battle.
His successor as Pimco's global chief investment officer was Dan Ivascyn, a celebrated investor in his own right during his nearly 20 years at the firm. But the similarities end there. If he is the new bond king, he is one for a different era.
Let's count the ways Ivascyn is different from Mr. Gross: He cuts a much lower profile. It's rare to see him on television. His comments about the market are filled with introspection. He actively seeks information that will disprove his basic assumptions.
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Mr. Ivascyn is responsible for leading strategy at one of the biggest investment firms at a treacherous time for debt markets and the asset-management industry more broadly. Actively managed bond funds need to either perform better than their peers or risk going out of business. Investors are not dazzled by a rock star personality; they just want good returns. They're willing to pay more for a fund that routinely outperforms rival funds and strategies but will quickly withdraw cash in favor of low-fee, indexed strategies if those expectations aren't met.
STAUNCHING THE FLOW
Mr. Ivascyn has experience delivering better-than-average returns. The $68.1 billion Pimco Income Fund, which he co-manages with Alfred Murata, has performed better than 98% of its rivals over the past three and five years. Morningstar named Mr. Ivascyn and Mr. Murata Fixed Income Managers of the Year for 2013.
And the superior performance has been rewarded with additional money from clients. While Pimco has shrunk to about $1.55 trillion in assets from $2 trillion in 2013, the Pimco Income Fund has more than doubled its assets.
I spoke with Mr. Ivascyn recently about how Pimco is approaching the year ahead given this difficult backdrop. He emphasized the process by which the Pimco team debates its investment views, where different members challenge one another in rigorous debate.
"The human mind tends to play tricks on us," he said in a phone conversation. "There's a tendency to seek out research that supports an existing view.”
The better approach, he said, is to actively seek out credible, contrarian views and data and consider the possibility that your views are wrong.
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Going into next year, Pimco has fewer high-conviction, macroeconomic calls than in the recent past, and it's aware that it's never been more expensive to execute trades. In 2017, the firm will likely spend a considerable amount of time trying to understand the policies of President-elect Donald Trump, whose election has spurred the biggest monthly selloff in U.S. government bonds since 2009.
BOND BLUES
Given the unpredictability, Pimco's funds have been increasing cash allocations in some portfolios and preparing for a default cycle at some point. While Pimco isn't expecting an imminent rash of insolvencies, Mr. Ivascyn thinks that a
recession is coming and that it's time to start preparing.
The market has "gone from fear to what seems like a good deal of complacency," he said. Investors have to be "very, very careful about a reliance on investments that are only where they are based on central bank policies." He cited Italian government bonds as a perfect example of this.
While investors have poured money into passively managed funds in the past few years and yanked money from actively managed ones, Pimco expects the pendulum to swing back toward human bond-picking in the next few years. That's because these rockier times tend to provide more opportunities for managers who can identify them.
"We need to strive to do particularly well during times that are particularly difficult for our clients," he said.
Lisa Abramowicz, [email protected], is a Bloomberg columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.
