Scott Mather, PIMCO Chief Investment Officer (CIO) U.S. Core Strategies, and Jerome Schneider, Managing Director and head of PIMCO’s short-term and funding desk, recently took over management of the PIMCO Low Duration strategy. They offer significant portfolio management experience and expertise, and in the following Q&A they discuss their new co-management responsibilities and how they will be positioning Low Duration moving forward.
Q: Can you describe the experience each of you brings to the Low Duration strategy?
Scott Mather: Jerome and I are both long-tenured portfolio managers at PIMCO, so we know each other well and have worked together in a number of capacities over the years. I joined PIMCO in 1998 and started out in mortgage and asset-backed securities. Later, I was responsible for building and leading PIMCO’s European portfolio management team. I eventually returned to Newport Beach as head of global portfolio management, helping to grow the business to over $120 billion in assets under management. I currently manage a wide array of diversified multi-sector portfolios across a broad duration range.
Jerome Schneider: I joined PIMCO in 2008 as a senior portfolio manager on the short-term and funding desk and became head of this area in 2010. In this role, I manage short duration portfolios as well as liquidity across all PIMCO strategies. I oversee more than $250 billion in cash-equivalent securities across the firm, including over $100 billion in dedicated strategies such as our $20 billion Low Duration complex.
Q: How are your backgrounds suited for managing this particular strategy?
Mather: Jerome and I have both been involved in the Low Duration investment process for many years, most recently through my participation on the Investment Committee (IC) and Jerome’s role as the manager of our short duration strategies. As part of PIMCO’s global team of more than 240 portfolio managers, we have each played an instrumental role in generating trade ideas that have driven the Low Duration strategy’s strong historical performance.
Schneider: As Scott mentioned, his role on the Investment Committee has enabled him to contribute investment ideas to the Low Duration strategy. Ultimately, the IC guides macro-level decision making at PIMCO and drives investment themes and risk exposures across all of the firm’s portfolios. I bring a specialized perspective as an expert in identifying opportunities and managing risk within shorter-duration strategies.
Q: Can you point to any particular areas of success historically?
Mather: Both Jerome and I have long histories of generating performance for clients in our respective strategies. What may not be readily apparent in those results, however, is our emphasis on risk management. Protecting on the downside and mitigating volatility is a critical focus in all of PIMCO’s strategies and in the Low Duration strategy.
Schneider: Scott makes a good point. Downside protection is particularly important in Low Duration, where our objective is to provide principal stability and less interest rate risk than a core bond strategy. When we look back and measure our success, we not only evaluate whether we have generated attractive alpha, but also how well we have managed risk.
Q: Historically, the Low Duration strategy has had one lead portfolio manager. Will having two managers mean there could be notable changes in the way it is managed?
Mather: We don’t anticipate changes in the way the strategy is managed. Low Duration has always benefited from PIMCO’s collaborative, team-based investment process, which draws on input from portfolio managers across the firm. This team-oriented philosophy has a proven history of driving success in the Low Duration strategy – just as it does in all PIMCO portfolios. In addition, Low Duration now benefits from two highly experienced portfolio managers with complementary backgrounds and skillsets who will be directly responsible for managing the fund. Given that each of us has a long history of managing multi-sector portfolios and leveraging the ideas of PIMCO’s specialist teams, we expect that the new structure will also provide a more direct link between the specialist desks and the portfolio.
Schneider: It is important to point out that most of the “big” macro decisions at PIMCO – such as high-level risk posture and interest rate positioning – are made by the Investment Committee, not by individual PMs or strategy teams. That said, portfolio managers are given ranges that allow for some flexibility within individual strategies. Scott and I will be responsible for making decisions related to implementation and bottom-up security selection and will seek to reach consensus. As Scott said, we have complementary skillsets and that will lead to collaborative decisions.
Q: Sometimes a change in portfolio manager results in outflows. How do you expect to manage liquidity in this circumstance?
Mather: PIMCO has always been at the forefront of liquidity management and this has enabled us to navigate difficult environments, such as 2008 and 2009, when markets felt the effects of the global financial crisis. We have always been able to meet investor redemptions and this is partly due to the expertise of Jerome and his team, among others. Jerome’s specialized experience in liquidity management is a distinct benefit for the Low Duration strategy. I would also note that the environment now is fundamentally different from what it was during the financial crisis because the markets are functioning normally. Moreover, given the mandate of the Low Duration strategy, many of the assets are already invested in high quality, highly liquid securities, and we are confident that we would be able to handle client redemptions in a wide variety of scenarios.
Q: Moving on to PIMCO’s current views, how are you positioning the portfolio for the environment ahead?
Mather: Our expectation of a New Neutral world of lower interest rates is an important anchor for our views. The Fed has been – and continues to be – focused on reflating the U.S. economy. For this reason, we expect that the Fed is likely to raise rates in a slow and gradual manner. In addition, central banks around the world, particularly in Europe, Japan and many emerging market countries, are likely to move toward additional monetary accommodation. We believe this has several key implications for fixed income portfolios. First and foremost, liquidity in the global markets is likely to remain ample for the foreseeable future. Although the global economic recovery remains uneven and fragile, it continues at a pace that should provide a supportive background for many yield-oriented fixed income sectors. It also extends the timeframe for a turn in the risk cycle. Finally, since not all central banks are moving in the same direction or at the same speed, the future is likely to hold many opportunities for managers who follow a flexible and tactical approach.
Schneider: Within Low Duration and PIMCO’s other short duration strategies, we’re emphasizing opportunities across the credit markets. Although credit spreads are tight, we see strong profits in many sectors and don’t see immediate signs that spreads might widen. We are selective with regard to both sectors and companies, and this is where we rely on our investment process and team of over 50 credit research analysts. Finally, the Low Duration strategy is one where principal stability and liquidity are important objectives. Many investors utilize this strategy as a step beyond money markets, while others consider it a way to reduce interest rate risk in their portfolios. As we work to meet the needs of these investors, we are focused on identifying opportunities to generate attractive risk adjusted returns while still providing an attractive liquidity profile.
Q: Any additional thoughts?
Mather: Jerome and I are very excited about working together. The strategy should continue to benefit from the full depth and breadth of PIMCO’s global resources, and our clients should remain confident that they will continue to reap those benefits.
Schneider: I’d like to echo that. Scott and I couldn’t be more thrilled about collaborating on the Low Duration strategy. Delivering positive returns and managing risk for our clients has been PIMCO’s primary objective since the firm’s inception. We plan to work hard to deliver the same world-class investment management that clients have come to expect from us.