PIMCO recently introduced the PIMCO Multi-Strategy Alternative Strategy, a comprehensive liquid alternatives approach that seeks attractive risk-adjusted returns and diversification relative to traditional stock and bond allocations. The approach accesses the full suite of PIMCO’s absolute-return-oriented liquid alternative strategies, including offerings across absolute return fixed income, equity long/short, equity market neutral and managed futures categories. In the following interview, portfolio managers Josh Davis, Mihir Worah and Mohsen Fahmi discuss the strategy’s objectives, investment process and role in an investor’s portfolio.
Q: What is the PIMCO Multi-Strategy Alternative Strategy?
Worah: The strategy is an “all in one” liquid alternatives approach that seeks to generate attractive risk-adjusted returns across market environments, with a focus on limiting portfolio downside during large corrections in equity or bond markets. The majority of the portfolio is dynamically allocated across the full suite of PIMCO’s liquid alternative offerings. It also has the ability to invest directly in individual securities, which helps facilitate better risk management and allows us to access additional complementary alternative strategies.
Q: What are the potential benefits to investors?
Davis: Return potential, diversification and convenience are the big ones. Through a single investment, our strategy allows investors to access the complete suite of PIMCO’s liquid alternative strategies.
In a New Neutral environment that anticipates muted returns and heightened volatility, many investors have looked to liquid alternatives in an effort to boost returns and lower overall portfolio risks. Yet the risks and returns of liquid alternative strategies tend to vary markedly between strategies, even within the same category. This creates a challenge for investors seeking to assemble and manage a diversified portfolio of liquid alternative strategies.
Our approach seeks to efficiently combine a range of complementary liquid alternative strategies, offering the potential for diversification and higher return per unit of risk than a single strategy could achieve on its own. In so doing, we address the three key challenges that investors face when allocating to liquid alternatives: strategy selection, asset allocation and risk management.
Q: What is unique about this strategy?
Fahmi: PIMCO is one of the few managers with such a broad suite of independent liquid alternative strategies, and we are the largest provider of alternative mutual fund strategies in the U.S. as of December 2014, as defined by Morningstar. Portfolio managers of the underlying liquid alternative strategies include two Morningstar U.S. Fixed-Income Fund Managers of the Year award recipients, Mark Kiesel in 2012 and Alfred Murata in 2013, as well as Rob Arnott, co-Founder of Research Affiliates and a pioneer in fundamental indexing.
A key differentiating feature of this strategy is its ability to tactically allocate and manage risk. We have full look-through into the investment positions of strategies that we manage in-house, which allows us to monitor changes in risk exposures and liquidity in real time. It also allows us to make prudent allocation shifts if we find there are meaningful changes in risk exposures of underlying strategies.
Furthermore, we primarily allocate to mutual fund strategies that provide daily liquidity in contrast to approaches that offer daily liquidity but allocate to third-party managers who may offer liquidity only on a monthly, or even less frequent, basis.
Finally, our approach has the flexibility to invest in individual securities to gain exposure to additional liquid alternative strategies and to manage overall portfolio risks. This allows us to efficiently manage overall exposures – both in the component strategies and at an aggregate level – and hedge undesired ones.
Q: Could you describe the investment process?
Davis: The investment process is designed to construct a portfolio that is balanced across a diversified set of strategies, optimized to achieve our investment objectives. It begins with our proprietary risk systems that look through the underlying strategies in real time to estimate key inputs in the portfolio construction process – in particular, correlations and volatilities of the underlying strategies. We then construct a target risk allocation that seeks to diversify risk across our investment opportunity set, while accounting for potential overlap in positions across some strategies. Finally, the portfolio is monitored daily to ensure allocations remain within target. Even though we already have a very broad investment opportunity set, we have the flexibility to include new strategies over time.
Mihir, Mohsen and I work closely as a team to evaluate new strategies for inclusion in the opportunity set.
Q: Could you elaborate on how investors should think about incorporating this strategy into their existing asset allocation?
A: The size and placement of an allocation in a portfolio can vary based on investor objectives and constraints. For investors who have carved out an allocation to liquid alternatives, this strategy can play a central role as it provides broad exposure to multiple liquid alternative strategies and seeks attractive risk-adjusted return potential and diversification to traditional stocks and bonds. Alternatively, because many of the strategy’s underlying investments seek to deliver returns from stock and bond markets but in a less constrained manner than traditional approaches, it can also be used as a stand-alone complement to traditional stock and bond allocations.