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William H. Gross
Bill Gross, PIMCO’s founder and co-CIO, recently assumed new lead portfolio management responsibilities for PIMCO’s Unconstrained Bond Strategy in connection with Chris Dialynas’ upcoming sabbatical. In this interview, Bill provides an Unconstrained Bond Strategy update and offers his perspective on the strategy’s potential benefits for our clients together with the Unconstrained Bond investment philosophy, process and approach. Given the challenges today’s markets present, many investors are looking to more flexible, outcome-oriented strategies such as Unconstrained Bond to complement traditional approaches in an effort to diversify risk and achieve a reasonable return on capital.
Q: Do you expect any prospective changes in the investment philosophy, process or portfolio management approach for the Unconstrained Bond Strategy? Gross: No, I do not anticipate changes in the investment philosophy, process or approach. Unconstrained Bond is a LIBOR-based strategy that incorporates our best ideas. That is the strategy as it has always been. Our goal is to provide a target absolute return with core-bond-like risk with an emphasis on shorter duration over time. That is the same strategy and the same expectation that Chris and others have talked about for the past few years and that doesn’t change.
Specific to the investment process, Unconstrained Bond positioning is based upon the model portfolio established by PIMCO’s Investment Committee. We outline on the board what we like in terms of different strategies, whether it’s duration, curve, currency, credit, volatility, etc., and then we translate these views into model portfolios. So the only differences between portfolio managers will be based on modest flexibility around the model. There may be Gross versus Dialynas differences at the margin but they won’t be significant. There is only so much leeway the portfolio managers have here and the model dominates.
Q: Following the recent cyclical forum and strategy sessions, what are PIMCO’s strongest views currently, and how will they be expressed in the Unconstrained Bond Strategy? Gross: Our strongest views are focused on what we call the curve and what we call volatility. We view the next several years, and certainly the next quarter, as a period in which central bank policies dominate. Janet Yellen is the new leader of forward guidance, and expected to provide a rather stable guide path for policy rates. We believe that the policy rate and the amount of time that it stays at 25 basis points is more important than the taper. It’s the policy rate that’s key and the policy rate that is critical to our particular strategies. If the policy rate stays at 25 basis points, then the front end of Treasury curves, the corporate curves, and other curves stabilize.
That is not to say that there won’t be a little bit of volatility in the front end of the curve. But we expect that they largely will stay where they are and that promotes a certain overemphasis for us in terms of selling front end volatility and extracting that premium, and taking positions on the front end of the curve and extracting a premium in terms of capital appreciation and yield. If the Fed promotes these positions with forward guidance, which is what we expect them to do, then attractive premiums can be earned with relatively little volatility, and relatively little duration. At the same time, we are de-emphasizing other forms of duration including 5-, 10- and 30-year exposures, which is the duration that will not be bought by the Fed going forward when they begin a gradual tapering.
Q: Can you provide insight as to how you think about Unconstrained Bond versus Total Return portfolio management? How are the strategies similar and how are they different? Gross: Unconstrained Bond has a benchmark of LIBOR and a target absolute return objective. Total Return has a benchmark of the Barclays Aggregate Index and an objective of outperforming that index. Therefore, each strategy has a different starting point for portfolio construction and a different objective. With Unconstrained Bond the client is effectively delegating to PIMCO where to be when in the fixed income market to achieve the long-term return objective whereas with Total Return the client is specifying a bond market index and PIMCO’s mandate is to outperform by actively managing around that index.
One big difference is duration. Unconstrained Bond can be defensive, and yet at the same time, provide adequate returns relative to expectations and end client goals. Total Return, on the other hand, has an index benchmark with a duration of more than five years, and the strategy can be decently underneath it but it cannot have a zero or negative duration.
Q: Do you anticipate that the additional responsibility you are assuming for the Unconstrained Bond Strategy will impact your other responsibilities? Gross: No. Actually I have been running Unconstrained Bond Strategy accounts of my own for two to three years. So a rather smooth transition from what I had been doing to what I’ll be doing going forward. It is really not much of a difference, certainly in terms of my schedule, nor in terms of the capacity at PIMCO, so I am looking forward to it.
Anyone who has seen me on the trading floor knows that that is my home. I come in at 5:30 a.m., and I leave at 4:30 p.m. I don’t travel. And all I do is sit in front of screens and give buy and sell orders based upon the model portfolios and cash flows, et cetera. I don’t pick up a phone and talk to a broker. Rather, the trades are implemented by the respective specialist asset groups around the trading floor. So, will things change for me? I don’t think so. The only difference I guess is that I really look at this as a positive challenge. I am excited from this standpoint and hopefully will show a lot of alpha in the process.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Absolute return portfolios may not fully participate in strong positive market rallies. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2013, PIMCO.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2014, PIMCO.
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