All Asset All Access

All Asset All Access, March 2019

In this issue, Research Affiliates assesses risks facing the All Asset strategies and shares insights from its CEO on fostering a winning corporate culture.

Christopher Brightman, CIO of Research Affiliates, discusses why investors in the All Asset strategies should assess risk more as the potential to meet (or miss) wealth accumulation goals, and less as a function of short-term price changes or returns relative to traditional benchmarks. Katy Sherrerd, CEO of Research Affiliates, discusses how a corporate culture that fosters collective intelligence while avoiding groupthink leads to winning outcomes for the firm’s employees, partners and clients. As always, their insights are in the context of the PIMCO All Asset and All Asset All Authority funds.

Q: What are the biggest risks facing investors in the All Asset strategies?

Brightman: Like all portfolios composed of capital market securities, the All Asset strategies expose investors to the absolute risk of short-term price changes. Investment professionals often quantify this short-term price risk using annualized standard deviation of returns, a statistical measure more commonly referred to as “volatility.” We believe a level of volatility of around 10% is appropriate for multi-asset portfolios, including those that center on Third Pillar assets (including real assets, emerging markets and high yield bonds). That level is roughly between the levels for stocks and bonds, given approximate long-term historical volatility of around 15% for the U.S. stock market and around 5% for an aggregate bond market portfolio (proxied by the S&P 500 and the Bloomberg Barclays U.S. Aggregate Bond Index, respectively).

What does an annualized volatility of 10% mean? For a hypothetical normal return distribution with an average annual real return of 5% and volatility of 10%, in two years out of three, the annual real return will fall within a range of −5% and +15%. This range is the “fat middle” of the distribution of potential returns. But let’s not forget about the tails of the distribution. In one year out of 20, the annual real return drawn from this hypothetical distribution will fall outside of the range of −15% and +25%.

Let’s now shift our focus for a moment from absolute risk to relative risk, or what we refer to as “maverick risk.” We believe John Maynard Keynes’ maxim pithily expresses the idea behind maverick risk: that it is more acceptable “to fail conventionally than to succeed unconventionally.”1 From a maverick risk perspective, return outcomes are measured on a relative basis, versus peers or traditional benchmarks. Because the All Asset strategies are designed and managed to serve as investors’ source of diversification away from mainstream stocks and bonds, investors in these strategies will of course experience ample maverick risk. Though interestingly, this measurement of risk says little about an investor’s absolute outcome.

Investment professionals quantify maverick risk as the standard deviation of the difference in returns between a portfolio and its benchmark, commonly called tracking error. The tracking error of the All Asset strategy relative to its primary benchmark (Bloomberg Barclays U.S. TIPS 1–10 Year Index) has been 6.53%, and the tracking error of the All Asset All Authority strategy relative to its primary benchmark (the S&P 500) has been 11.34% (since inception, through 28 February 2019).

Returning to absolute risk in the near term, what events could cause a large decline in prices for capital market securities over the coming months? We can readily identify hypothetical and entirely plausible economic or geopolitical scenarios that might cause investors to try to reduce their exposure to risk assets in concert. For instance, a disorderly liquidity squeeze could be the unintentional result of quantitative tightening, a debt crisis in China triggered by a trade war with the U.S., or a solvency crisis for European banks precipitated by a hard Brexit. Of course, these potential problems aren't mutually exclusive; we could very well experience two or even all three in 2019.

Key to a more complete understanding of capital market risk, however, is the observation that market crashes often follow long periods of rising prices without any obvious geopolitical or economic catalyst – for example, the popping of the Japanese bubble in stocks and real estate in 1990 and the collapse of global technology stocks in 2000. From these historical events, we believe that high-priced, low-yielding assets, such as developed market government bonds and U.S. stocks today, might have lower potential to meet long-term goals than lower-priced, higher-yielding assets, such as high yield bonds and emerging market equities today.

For long-term investors, risk may be defined less by the short-term price changes of securities within our portfolios and more by the potential failure to meet our wealth accumulation goals. Accordingly, a more appropriate, if admittedly less precise, quantification of risk for long-term investors may be an estimated probability of reaching, or failing to reach, long-term return requirements. Research Affiliates offers investors interactive tools to help quantify the probability of a portfolio achieving a range of real returns over a 10-year horizon using transparent and well-documented methodologies for estimating asset class and portfolio return forecasts.

We believe today’s high prices and low yields for a traditional portfolio consisting of 60% U.S. stocks and 40% U.S. aggregate bonds may present a significant risk to investors, in terms of an inability to meet long-term wealth accumulation goals. Our methodologies estimate that a traditional 60/40 portfolio (proxied by the S&P 500 and the Bloomberg Barclays U.S. Aggregate Bond Index) has less than a 50% probability of producing more than a 2.5% annualized real return, and a small but significant probability of producing less than 0% real return over the coming decade.

In contrast, for a portfolio favoring lower-priced and higher-yielding assets, such as “Third Pillar” assets including non-U.S. stocks and credit strategies,2 this methodology estimates a greater than 50% probability of achieving a 4% real return or above and less than a 5% probability of achieving a 1% real return or below over the coming decade. In other words, we believe this style of portfolio, in the go-forward environment, presents less risk to investors as defined by a likelihood of meeting long-term wealth accumulation goals, even though it may have elevated levels of maverick risk (or return differentials) relative to traditional benchmarks.

Said plainly, for long-term investors, we believe high prices and low yields indicate a lower potential to meet longer-term goals, while the reverse is true for low prices and high yields – and volatility provides opportunity. In the current environment, we think investors should consider Keynes’ maxim – and the tradeoff between failing conventionally and succeeding unconventionally – very carefully.

Q: How will Research Affiliates’ recent governance changes, including your transition to CEO, influence management of the All Asset strategies?

Sherrerd: Quite simply, the management of the All Asset strategies benefits tremendously from our long-held commitment to creating a corporate culture that allows teams to perform at their highest levels. I am a big proponent of the benefits of collective intelligence – particularly in our industry, where even the smartest member of a team can benefit from hearing different points of view – and the need to be deliberate in creating an environment conducive to productive collaboration.

Over the past four decades, my passion and experience have centered on management and leadership in the investment industry, which is complementary to the primary skills of my partners – and co-portfolio managers for the All Asset strategies – Rob Arnott and Chris Brightman. I joined Research Affiliates in November 2006 to help build a high-functioning and sustainable firm, and one of our early initiatives was to cultivate a corporate culture that would support winning outcomes for our clients, partners and employees. A key driver of our culture then, as it is today, was a shared belief in the benefits of collaboration and the value of diverse opinions.

In a recent piece titled “The Winning Formula,” I shared three elements of our firm’s management that I view as crucial for long-term success: mission, team and culture. The influence of firm culture is deeper and more impactful than many assume. First, a culture founded on core values3 inherently influences our people, who are critical to the long-term success of our firm, our partners and our clients. Leadership, research, strategy development, product development and relationship management efforts that benefit the All Asset strategies all spring forth from our people.

Second, and importantly, beyond supporting individuals alone, a sustainable culture has the potential to foster high-functioning teams and raise levels of collective intelligence. Studies have shown that randomly selected groups of people perform better than the single most intelligent person (as measured by IQ) in the group. And based on my research, a corporate culture that embraces diversity and nurtures inclusion raises collective intelligence levels and reduces groupthink, which in turn leads to more effective leadership and management practices, better decision-making outcomes and greater creativity and innovation.4 Accordingly, we are intentional about fostering two elements necessary for raising collective intelligence levels and minimizing groupthink: 1) ensuring cognitively diverse teams and 2) fostering environments that value curiosity, respect and independent – particularly dissenting – views.

Our advisors at Research Affiliates have studied the relationship between culture and long-term value, and the results support our approach. In a 2011 study,5 Alex Edmans found that firms whose employees have high levels of job satisfaction – as measured by those listed in Fortune magazine’s “100 Best Companies to Work for in America” – also tend to deliver high long-term stock returns. Over a 26-year span ending 2009, these firms beat their peers by 2.4% to 3.7% per year. And in a 2018 study, Campbell R. Harvey and his coauthors also found that cultural values and norms are positively correlated with firm value, innovation and ethical outcomes.6

Over the past decade, we have embraced the importance of building a high-functioning, sustainable culture. In a world and an industry where the only constant is change, this commitment is essential to deliver on our mission of conducting research and advancing innovative products for the benefit of investors in the All Asset strategies.

Further reading

Recent editions of All Asset All Access offer in-depth insights from Research Affiliates on these key topics:

  • The potential impact of a bear market in U.S. stocks on emerging markets (February 2019)
  • Research Affiliates’ outlook and asset allocation views for 2019 (January 2019)
  • Market impact of the U.S. midterm elections and what differentiates All Asset’s positioning versus peers (December 2018)
  • Outlook for achieving All Asset’s long-term real return benchmark and its approach to assessing country risk (November 2018)
  • Three key ways to “bucket” the All Asset strategies and a recap of year-to-date returns (October 2018)
  • Historical returns and diversification relative to peers, plus views on emerging market currencies (September 2018)

The All Asset strategies represent a joint effort between PIMCO and Research Affiliates. PIMCO provides the broad range of underlying strategies – spanning global stocks, global bonds, commodities, real estate and liquid alternative strategies – each actively managed to maximize potential alpha. Research Affiliates, an investment advisory firm founded in 2002 by Rob Arnott and a global leader in asset allocation, serves as the sub-advisor responsible for the asset allocation decisions. Research Affiliates uses their deep research focus to develop a series of value-oriented, contrarian models that determine the appropriate mix of underlying PIMCO strategies in seeking All Asset’s return and risk goals.

1In Chapter 12 of “The General Theory of Employment, Interest and Money,” Keynes writes, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
2 Based on an equal-weighted portfolio of EM equity (MSCI EM Index), EAFE equity (MSCI EAFE Index), EM local bonds (JPMorgan GBI-EM Global Index), commodities (Bloomberg Commodity Index), U.S. high yield (Bloomberg Barclays U.S. Corporate High Yield Index), and REITs (FTSE NAREIT All Equity REIT).
3 We build our culture around core values of responsibility, curiosity, authenticity and collaboration. Not only do we actively seek to live and practice these values, we are also deliberate about minimizing the potentially destructive anti-values of blaming, committing to being right, withholding information and lacking trust in others.
4 For further insights, see “The Challenges of Diversity Investing” (2018), which I coauthored with Research Affiliates’ Jonathan Treussard and Lillian Wu.
5 See “Does the stock market fully value intangibles? Employee satisfaction and equity prices,” published 30 March 2011 in the Journal of Financial Economics. Edmans’ 2012 study, “The Link Between Job Satisfaction and Firm Value, With Implications for Corporate Social Responsibility,” showed similar findings.
6 Graham, John Robert, Jillian Grennan, Campbell R. Harvey, and Shivaram Rajgopal. 2018. “Corporate Culture: Evidence from the Field.” 27th Annual Conference on Financial Economics and Accounting Paper; Duke I&E Research Paper No. 2016-33; Columbia Business School Research Paper No. 16-49. Available at SSRN.
The Author

Chris Brightman

Chief Executive Officer and Chief Investment Officer, Research Affiliates

Katrina Sherrerd

Vice Chair and Senior Advisor, Research Affiliates


Related Funds


Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund’s prospectus and summary prospectus, if available, which may be obtained by contacting your investment professional or PIMCO representative or by visiting Please read them carefully before you invest or send money.

Past performance is not a guarantee or reliable indicator of future results.

All Asset Fund inception: 31 July 2002; All Asset All Authority Fund inception: 31 October 2003.

A word about risk: The fund invests in other PIMCO funds and performance is subject to underlying investment weightings which will vary. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investing in securities of smaller companies tends to be more volatile and less liquid than securities of larger companies. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Entering into short sales includes the potential for loss of more money than the actual cost of the investment, and the risk that the third party to the short sale may fail to honor its contract terms, causing a loss to the portfolio. The use of leverage may cause a portfolio to liquidate positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Leverage, including borrowing, may cause a portfolio to be more volatile than if the portfolio had not been leveraged. Derivatives and commodity-linked 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. Commodity-linked derivative instruments may involve additional costs and risks such as changes in commodity index volatility or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in derivatives could lose more than the amount invested. The cost of investing in the Fund will generally be higher than the cost of investing in a fund that invests directly in individual stocks and bonds. Diversification does not ensure against loss.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. 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 for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.

Bloomberg Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. The S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. It is not possible to invest directly in an unmanaged index. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The JPMorgan Government Bond Index-Emerging Markets (GBI-EM) indices are comprehensive emerging markets debt benchmarks that track local currency bonds issued by Emerging Market governments. The index was launched in June 2005 and is the first comprehensive global local Emerging Markets index. The Barclays U.S. Corporate High-Yield Index the covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes Emerging Markets debt. The FTSE NAREIT Equity Price Index (“North American Real Estate Investment Trust Equity Index”) includes REITs listed on the New York Stock Exchange, Nasdaq, and American Stock Exchange.

It is not possible to invest directly in an unmanaged index.

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 is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2019, PIMCO.

PIMCO Investments LLC, distributor, 1633 Broadway, New York, NY, 10019 is a company of PIMCO.

All Asset All Access: Investment Implications of Inflation Expectations
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