Andrew Balls, PIMCO’s CIO Global, recently took the helm of our global/foreign strategies, alongside Sachin Gupta, head of the global trading desk in Newport Beach; Lorenzo Pagani, head of the European rates desk in Munich and Tomoya Masanao, head of portfolio management Japan in Tokyo. These individuals bring a depth of investment experience to the management of global bond portfolios, having worked together with Scott Mather, CIO U.S. Core Strategies, for nearly a decade. In the following Q&A, we asked Andrew and his team to tell us about their backgrounds, PIMCO’s approach to global investing, why an investment in global bonds makes sense today and where they are finding opportunities.
Q. How do your different backgrounds fit together to help you manage global portfolios?
Andrew Balls: Our team combines four seasoned global portfolio managers spanning three continents, with each member bringing a different area of focus to the table. Sachin is the head of our global trading desk in our Newport Beach headquarters. Previously, he worked for PIMCO in Singapore and London focusing on global portfolios and has served on both our Asia Pacific and European regional portfolio committees. Lorenzo works out of Munich as head of our European rates desk and currently chairs our European portfolio committee (EPC), while managing key global portfolios. He has played an instrumental role in Europe, particularly as we successfully navigated the European debt crisis over the last several years. Tomoya-san is head of Japanese portfolio management located in Tokyo, and as a key member of our Asia-Pacific portfolio committee (APC), provides guidance on our regional economic and investment outlook and managing global portfolios. Finally, as CIO Global, I will work closely with the team to determine global and regional risk positioning for our portfolios.
Q: Is this a big change to the way global portfolios were managed previously?
Balls: No, this is not a big change at all. Our team has worked on global portfolios for years, collaborating closely with the rest of the PIMCO team, as well. Collectively, we’ve managed over $40 billion in global portfolios over the past five years for our clients around the world. So there will be no big changes in our investment process, which is based on the Secular and Cyclical Forums, the Investment Committee (IC) and the regional portfolio committees with the IC leading the strategy process and overseeing the implementation of strategies. This is the process that determines our investment positioning, not individuals working in isolation. In fact, Scott and I have been working closely together for nearly a decade, both as members of the IC and as PIMCO’s global generalist PMs. And we will continue to work closely together in the future.
In terms of my own role, as CIO Global, I oversee the global team, the European and Asia-Pacific teams, and the emerging markets team. But this is not a big change in my role. Since 2010, I’ve had the same PM management responsibilities – the only thing that has changed is the title! These management responsibilities are in addition to my PM assignments managing global and European funds and separate accounts. So there is a lot of continuity in how we are organized, as well as in the PIMCO investment process.
Sachin Gupta: Agreed, there is no change to the underlying team of more than 250 portfolio managers worldwide that help feed ideas into our global strategies. Where you can sometimes see some minor differences is in the sizing of individual strategies. This is based on differences in profiles of various portfolios, opportunities in the market at the time of portfolio flows, and some portfolio manager discretion in the way in which specific firm-wide views are expressed.
Q: Can you describe how you will work together?
Balls: I will take the lead on the global strategy, managing our flagship funds around the world, leading our team and working closely with Sachin, Lorenzo and Tomoya-san. We bring together the CIO Global, the head of the global trading desk, the head of the European rates desk and the head of portfolio management Japan. This is a strong team. We will gain insights from the regions and from across the specialist desks. In addition, the team’s close connection to our specialty desks around the world will contribute significantly to our bottom-up alpha generation.
Tomoya Masanao: Absolutely. The on-the-ground insights we get in our respective regions are immensely helpful for overall global positioning. While I’ve managed global portfolios for 13 years, I also oversee the team in Tokyo that manages local Japanese strategies. This, as well as my proximity to our other investors in the rest of Asia, enhances bottom-up issue selection and ensures best execution for the global portfolios managed by us all.
Lorenzo Pagani: As Andrew mentioned, I chair the EPC, the chief decision-making body for European investing. The EPC parallels similar committees in Asia Pacific and the Americas. You can think of these committees as the eyes and ears of the firm for what happens in different areas around the globe, a forum for debate and ultimately for reaching sound investment conclusions. As a global portfolio manager, I can reiterate what the others have already said: The structured process that has always been in place is invaluable for transmitting ideas across regions so that global portfolio managers can integrate all the best ideas from around the world.
Q: Will the objectives of the Global/Foreign Bond Strategies change?
Balls: Definitely not. We will continue to manage global portfolios in the same way as before: with the aim of generating excess returns above their benchmarks with disciplined risk management. In many ways, I think there is more opportunity than ever for global portfolios. We are going through a period not only of divergence in the big global economies, but also divergence among the big central banks, with the U.S. and the U.K. set to tighten, the ECB doing more policy loosening, and the BoJ continuing to expand its balance sheet. This affords interesting opportunities in terms of global rates, relative value trading and in currency positioning. This new reality enhances the diversification benefits of global portfolios, which is the chief driver of their superior risk-reward ratios. For example, the global opportunity set means that we don’t need complicated solutions to address concerns about rising interest rates. We can diversify by emphasizing markets where investment opportunities are most favorable.
Q: So what opportunities are you finding in the current environment?
Gupta: In the Americas, Mexican rates and currency remain a favorite theme. First, the real yields in Mexico appear very attractive compared to most developed bond markets, where real yields are zero or even negative. Secondly, we think that the Mexican Central Bank will remain dovish and inflation will continue to converge towards target. Lastly, Mexican duration has attractive carry. We think that the country has made tremendous improvement from financial stability, external balances, and inflation control, reflecting a great long-term position.
Masanao: Another opportunity today is in currencies. Again, diverging central bank policies are central to our thesis. We remain underweight to the Japanese yen and the euro versus the U.S. dollar as we anticipate significantly accommodative policy in Japan and Europe, contrasting the Fed, which is moving slowly toward its first rate hike sometime next year. In rates, we like the long end of the Japanese government yield curve. With the enormous quantitative easing (QE) program in Japan, the long end of the yield curve looks relatively attractive versus the front to intermediate part of the curve, which is already repressed by the BOJ’s efforts. Moreover, the long end will benefit more should the BOJ ease further.
Pagani: The eurozone landscape looks particularly interesting at the moment. Inflation is far below target, the economic recovery remains painfully slow and the ECB is finally beginning to demonstrate the kind of support that other central banks demonstrated years ago. This has significant implications for the value of the euro, as Tomoya-san already mentioned, the shape of the yield curve, relative valuations between core and periphery government bonds, and, of course, the value of riskier assets.
Q: Any other thoughts?
Balls: To reiterate, our team has worked together, including with Scott Mather, for nearly a decade. Our investment process hasn’t changed; we’ve always worked as a team with our portfolio managers located around the world. I am excited to lead the team, managing our global and foreign strategies around the world. Investors can feel confident that we will continue to deliver the same world-class investment management they have come to expect from the PIMCO team!