Today’s investing success, as we are so often reminded, is not a guarantee of future success.
Yet in more than 16 years at PIMCO, I have learned that three investment pillars have the best potential to deliver alpha consistently over time. These
principles will continue to frame PIMCO’s approach to actively managing risk and delivering returns for our clients.
They are macro forecasting, structural portfolio positioning and bottom-up analysis.
These pillars are ingrained in our investment process. During our quarterly forums, in which our global investment professionals gather in Newport Beach,
we engage in a detailed analysis and debate of the cyclical and secular outlook for economies and markets. In daily meetings of our Investment Committee we
refine our macro conclusions and determine our investment guardrails – the top-down scaling of exposures to various sources of risk premia.
Portfolios are further informed by the bottom-up research and insights of over 250 portfolio managers and 130 analysts. One of Bill Gross’s enduring
legacies at PIMCO was to help establish an investment process that we have fully institutionalized over many years.
Even in well-established and smoothly running operations there is room for fine tuning. Indeed, while our core investment process continues, we need to
adapt in certain areas as both markets and the objectives of our clients evolve – that is essential to delivering on those objectives over the long term.
Sound investing begins with having a strong view on investment trends over several years. An investor who can get key secular, or long-term, trends right
should be well on the way to achieving investment success.
As Group Chief Investment Officer I will direct our investment team to engage in the formulation of macro theses with even more rigor. We have long
conducted robust global macroeconomic analysis, yet recent hires – and we have been fortunate to attract top talent over the years – have suggested that we
could expand even further the quality and depth of our forecasting of key economic variables at the country and regional levels. We will do so, to the
benefit of both global and regionally-oriented portfolios.
A careful study of longer term economic trends affecting financial markets has been a hallmark of our investment process. Following considerable analysis
at our Secular Forum in May 2009 we introduced our New Normal thesis; we forecasted many years of below-trend growth and low inflation as a result of
considerable headwinds associated with excess leverage, increasing regulation, unfavorable demographics and ongoing risk aversion as a result of the
This May we updated our view with The New Neutral: We believe lower neutral monetary policy rates across the developed world will continue to serve as an
important anchor for the secular valuation of all asset classes. However, cyclical deviations around neutral will occur, and it will be equally critical to
understand divergence in growth and inflation trends across regions. In fact, it is these anticipated deviations between U.S. and European growth and
inflation rates that continue to drive relative value decisions across these markets, including our belief in continued U.S. dollar strength over our
The second pillar, a hallmark of PIMCO’s investment process, is the identification of structural sources of alpha. From time to time, market inefficiencies
not only occur but also endure for considerable periods. Examples of investment positioning for these inefficiencies include being a net seller of
volatility over the course of a market cycle, focusing on steep portions of yield curves including front-end roll-down strategies and orientating to value
versus growth in security selection.
One area of focus I intend to encourage among portfolio managers is seeking structural inefficiencies that have developed somewhat recently across the
quickly expanding non-U.S. financial markets. These will include institutional frictions associated with the considerable new and complex regulation across
the financial industry that we believe will lead to new opportunities to generate strong and persistent risk-adjusted returns for our clients.
The third pillar is a classic one – bottom-up analysis. This is one of PIMCO’s great strengths. Our global team of portfolio managers and analysts, which
has increased 17% in less than two years, equates to significant resources across nearly all segments of the financial markets. More recent hires have
expanded our capabilities in the interest rate, volatility and credit markets.
Mark Kiesel, CIO Global Credit, leads a skilled team of credit experts. We recently named Mark to the portfolio management team of our flagship Total
Return Strategy – along with Mihir Worah, CIO Real Return and Asset Allocation, and Scott Mather, CIO U.S. Core Strategies, who makes the day-to-day
decisions on TR – and this, in effect, recognizes the credit team’s many contributions of security selection ideas to TR (and to many other strategies). In
September’s Global Credit Perspectives, Mark highlighted attractive industries, including healthcare, lodging, Asian gaming, pipelines, wireless
telecom, cell towers, satellite, media and U.S. banks.
We plan to continue to improve the bottom-up linkages of portfolio decision-making by continuing to foster an environment of idea generation across the
portfolio management team – and that includes encouraging newer team members with fresh perspectives to contribute to portfolio discussions. Harnessing the
best ideas from colleagues on the ground across our global offices has played an important role in delivering returns in the income strategies I co-manage.
So great top-down thinking, identifying key structural trades that can generate incremental alpha in a variety of market environments, and disciplined
bottom-up analysis and implementation should be the basis for sound investing.
Collaboration with the other CIOs and their teams is critical. They all have established track records, and in my view are among the most talented
investment managers in the industry. Of course, I will be the final arbiter in Investment Committee meetings and for other decisions of the portfolio
management group. However, as we have in the past, we will look to achieve consensus where possible through ongoing, rigorous debate on all aspects of
portfolio positioning. My only additional direct strategy involvement has been joining the Unconstrained Bond Strategy team, which is led by Saumil Parikh.
Otherwise, I will continue to focus on the income and alternative investment strategies that I have been involved in, delegate where appropriate, and be
conscious about taking on additional responsibilities.
I have not been in the public eye much since starting at PIMCO in 1998, having instead focused almost obsessively on delivering risk-adjusted returns for
our clients. If others review my body of work over the years, I hope they are comfortable with the value proposition of the mandates that I have managed.
In this new role, I look forward to interacting with more of our clients more often, sharing our investment views and answering questions. Indeed, all of
us at PIMCO are focused on client service, and dialogues with clients help us to offer investment strategies that are appropriate for their objectives and
to sharpen our theses about the markets. We are listening.