Strategy Spotlight

PIMCO Global Multi‑Asset Strategy: Q&A with Mihir Worah

A comprehensive, tactical asset allocation strategy for today’s market environment.

Q: Since the financial crisis, a buy-and-hold approach and static balanced strategies have worked well for many investors. Why change now?

Mihir Worah: Following the rising tide of economic stimulus via global monetary policy and quantitative easing, many asset classes have experienced exceptionally strong returns since the financial crisis. Higher valuations have been supported by falling inflation and lower interest rates.

But we believe this tailwind is about to fade and as a result, static buy-and-hold strategies are likely to deliver lower returns. As the U.S. Federal Reserve and other global central banks look to raise rates and inflation is poised to recover, the combination of higher rates with fair to rich valuations and meager starting yields means that investors should expect lower returns from most asset classes in the future. Furthermore, volatility, which has been largely subdued lately, is also likely to rise.

To be sure, we believe compelling returns can still be generated, but achieving them will require approaching portfolio construction differently. Most importantly, investors will need to broaden their opportunity set and adopt a more tactical approach. For example, if you look across multiple economic cycles across all major asset classes, the spread between the top and bottom performing asset class has been 45%* on average. That is a big number. It means there is a lot of room year-after-year to increase return potential and to seek to avoid risks by being tactical. With low long-term return prospects for traditional asset classes, as we recently highlighted in our Secular Asset Allocation Outlook, we believe active management will become an even more important driver of return.

Q: How would you describe the goals of PIMCO Global Multi-Asset Strategy? Where does it fit in?

Worah: Global Multi-Asset is designed to be a comprehensive asset allocation strategy. Our objective is to deliver meaningful outperformance on a consistent basis over a benchmark of 60% Global Stocks and 40% Global Bonds1, (which essentially is the market portfolio) with a similar risk profile. We manage the portfolio very tactically – allocations can shift quickly as market conditions evolve – but we have clear risk guardrails. Ultimately, our goal with this strategy is to provide investors with access to PIMCO’s highest conviction macro and relative value ideas in a single package with daily liquidity.

Global Multi-Asset can fit in many places within an existing asset allocation. As the portfolio is highly diversified and global, the strategy can serve as a core portfolio holding. Some investors are also using it as a key component of the global tactical asset allocation bucket.

I think Global Multi-Asset is especially well designed for the market environment we are in now and likely to face going forward. Our broad opportunity set, coupled with guideline flexibility, provides us the ability not only to source the most attractive investment opportunities, but also to meaningfully take risk off the table if conditions warrant.

Q: Since you became lead portfolio manager in January 2014, Global-Multi Asset has delivered excellent performance. In the past twelve months as of June 30th, the strategy outperformed 99% of its Morningstar category peers. What changes have you made since assuming the leadership of this strategy?

Worah: Yes, I’m pleased with our performance thus far and feel very confident we can continue to deliver.

Since assuming lead PM responsibilities, I have made several changes. Before I delineate them, let me provide our readers with a brief background. Global Multi-Asset was launched in late 2008 on the heels of the global financial crisis. Unfortunately, the performance until early 2014 was not up to PIMCO standards. In particular, 2013 was a very challenging year for this strategy.

Now Global Multi-Asset has an entirely new portfolio management team. We have evolved the investment process and significantly increased the involvement of our Portfolio Analytics team. Finally, we have updated the benchmark of the strategy to provide complete style clarity to investors.

The changes we have made seem to be working. Despite the strategy retaining its name and full historical track record, the performance since January 2014 represents the stewardship of my team and our tactical style of management. As investors consider an investment in this strategy, I hope they will consider Global Multi Asset’s track record that reflects the changes I have led going into effect, and that investors recognize PIMCO’s commitment to delivering a world-class asset allocation strategy.

Q: So what have been the key drivers of performance recently?

Worah: Our performance has been driven by a diverse range of investment strategies, both macro and bottom-up. On the macro side, our region and country selection in equities, as well as being long the U.S. dollar, were key contributors. We were also able to add alpha by sourcing bottom-up opportunities from PIMCO’s deep bench of analysts.

As markets have delivered returns in a lumpy fashion, our tactical management of positions also played a critical role. For example, two key conclusions from our Cyclical Forum in late 2014 were that European and Japanese equity markets were attractively valued and would benefit from significant quantitative easing programs. While it was the right call, our tactical management of these positions – in particular, actively managing currency risk and reducing risk ahead of the recent turbulence in Greece – were particularly beneficial.

Another point I would stress: it’s not just about picking the right regions or countries; instrument selection matters a lot too. For example, last year in 2014, we invested primarily in on-shore Chinese A-shares3 as they were more attractively valued vs. off-shore H-shares2, which proved to be a very good trade. However in 2015, we transitioned our exposure to the offshore H-share market as the valuation scale was tilted much more in their favor at the beginning of 2015. While Chinese equities across both onshore and offshore indices have sold off this year, we were much less affected as the recent sell-off had an outsized impact on the locally listed onshore A-shares.

Q: You mentioned the entire team is new, can you provide a bit more background on some of them?

Worah: Asset allocation is a strategic priority for PIMCO and we have invested heavily in this area. I’ve always tried to build my teams with the best investors in the world, and the team I’ve put together for Global Multi-Asset is no exception. Since I assumed lead PM responsibility, three additional portfolio managers have joined the team, all accomplished investors with impressive track records. Some came to PIMCO from highly respected global macro hedge funds.

Geraldine Sundstrom, who is now co-lead portfolio manager with me on the strategy, is an exceptional investment talent and has 17 years of experience investing across the capital structure and asset classes at Brevan Howard and Moore Capital. Geraldine’s extensive background in emerging markets further bolsters our investment expertise in those key regions. In addition to Geraldine, Rahul Devgon has joined the team. Rahul was previously at Moore Capital and contributes cross-asset and relative value strategies to the portfolio. He is a seasoned investor with 17 years of global macro and relative value trading experience. Finally, Nic Johnson, a longstanding member of our real return team and someone I have worked closely with for the past 10 years, is also now part of the team. Nic contributes real assets and bottom-up ideas to the portfolio. But we don’t rely on just this immediate team to drive results. Mohsen Fahmi and Lorenzo Pagani, both senior portfolio managers and managing directors, also contribute relative value strategies. A large portion of our success thus far has been driven by our ability to leverage the full PIMCO platform and global resources.

Q: Global tactical asset allocation is a pretty broad category. How should investors think about PIMCO Global Multi-Asset relative to other offerings?

Worah: We see the strategy as having three key differentiating features, that should provide us with an edge.

First, as I just discussed, is the team. The investment talent we have is typically accessible only through investments in top macro hedge funds, which tend to have lock-ups and fee structures that include both management and performance fees. Investors in Global Multi-Asset can access the same caliber of talent, albeit in a structure that provides daily liquidity and a fixed fee.

Second, PIMCO is one of the very few asset managers that combine a top-down macro investment process with significant bottom-up research expertise. Our top-down investment process is well known and our track record over the past 40 years stands as evidence of its efficacy. What may be less well known is our deep bench of over 260 portfolio managers and 60 research analysts providing valuable bottom-up insights and ideas across all asset classes. Our top-down process helps identify key macro catalysts and market turning points, while our bottom-up expertise helps us get the most out of every asset class. It’s this combination that’s been the key to our success. I believe very few other firms have the platform and asset class expertise that PIMCO has.

Finally, I believe the breadth of our opportunity set provides us a greater ability to capitalize on what we expect will be increasingly divergent sources of potential returns in the years ahead. We invest across the full spectrum of liquid asset classes, including developed and emerging equities and bonds, real assets, currencies and alternative risk premia strategies such as managed futures and merger arbitrage. We also have a diverse array of instruments to draw on: We can gain exposures via individual securities, PIMCO mutual funds and PIMCO or third-party ETFs. This allows us to be quite precise and target exactly what we want. This, plus PIMCO’s global presence and access, allows us to source attractive opportunities we believe may not be available to many investors.

These are our key differentiators and should give us an edge in the environment ahead.

*Based on calendar year returns of the following indices from 2000-2014: Citi 3m Tbill, Barclays Global Agg USD Hedged, Barclays Corporate High Yield, Bloomberg Commodities Index, Barclays US Tips, JPMorgan Emerging Market Bond, MSCI Europe, S&P 500, DJ US Select REITs, Global 60/40 = 60% MSCI ACWI and 40% Barclays Global Agg USD Hedged

1 The strategy seeks total return, which exceeds that of a blend of 60% MSCI All Country World Index/40% Barclays Global Aggregate Index (USD Hedged).

2 As represented by the HSCEI Index, local currency total return

3 As represented by the SZCOMP Index, local currency total return  

The Author

Mihir P. Worah

CIO Asset Allocation and Real Return

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