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Making a market

Neel Kashkari is planning for the future

Neel Kashkari is planning for the future by slowly building an equity enclave within the walls of fixed-income behemoth PIMCO

Neel Kashkari came to public notice when former Treasurer Secretary Henry Paulson named him in October 2008 to head the Treasury's $700 billion Troubled Asset Relief Program. The sheer dollar amount of the program designed to help banks get rid of toxic loans raised the former Goldman Sachs investment banker's profile from relative obscurity to man in the news.

Mr. Kashkari resigned that post in May 2009 as bailout chief after the transition to the Obama administration. He joined Pacific Investment Management Co. LLC in Newport Beach, Calif., in December 2009 with the title of managing director and head of new investment initiatives. His title was later changed to head of global equities to reflect the fact that Mr. Kashkari was spending all his time focused on building PIMCO's equity franchise.

PIMCO's first equity strategy was called EqS Pathfinder and was launched in April 2010. The deep value strategy, which now has $3.5 billion, is PIMCO's biggest in equities. Now, PIMCO has four equities strategies. The others are global emerging markets and global dividend, both launched last year, and a global long/short strategy that launched in May.

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Neel Kashkari

  • Current position: Head of global equities, Pacific Investment Management Co. LLC, Newport Beach, Calif.
  • Assets: Equities, $5.7 billion; total assets, $1.77 trillion.
  • Age: 38
  • Education: Bachelor's and master's degrees in engineering from the University of Illinois at Urbana-Champaign; MBA from the Wharton School of the University of Pennsylvania.
  • Number of employees supervised: 50
  • Interests: Swimming, biking, lifting weights.
  • Investment performance (as of 6/15):
    • One year: 0.17% Benchmark: -3.1%
      Emerging Markets Equity
    • One year: -5.57% Benchmark: -15.4%
  • Benchmarks, respectively: MSCI World index, MSCI Emerging Markets index

PIMCO has gathered more than $5.7 billion in equity assets in a little more than two years, with institutions accounting for 10% to 20% of that. But it is just a drop in the bucket for a fixed-income giant: Equities make up less than 1% of PIMCO's total assets of $1.77 trillion.

Fixed income is PIMCO's specialty. Why push into equities when investors seem to be running away from it? Well, a couple things. First, if you go back to why we're going into equities at all — coming out of the financial crisis, many of our clients are asking us for more comprehensive advice. Where they say, “PIMCO, you did a great job managing our bond portfolios in the crisis. But you know, what we are doing in these other asset classes didn't work as well as we'd hoped. Can you give us advice across asset classes?” And that's what we talk about ... we want to provide clients solutions rather than just narrow products.

But providing solutions and advice doesn't mean you have to offer active equities. For us to be a solutions provider, we have to be in active equities. I understand what you're saying — that a lot of flows are coming out of equities right now. But we're not doing this to make a short-term investment. This is long term; I talk about this as a seven- to 10-year build. Seven to 10 years to build the depth, the quality — PIMCO quality — in equity management. That's what we're embarking upon.

And so you're right; in the next year or two, flows may be out of equities. But I bet maybe five years from now, flows may be back into equities. ... The point you start at doesn't matter that much when you're in it forever.

Why didn't PIMCO buy an outside equity manager? Why build its own? A lot of firms have fixed income and equities because they did big acquisitions and they're trying to jam these things together. And for compliance reasons and legacy reasons, they have big walls and don't allow them to talk to each other. We're hiring everyone one at a time, or pairs of people, screening for investment excellence and cultural fit, and building this integrated model. There's no way we could acquire a firm and have it integrated in the way that we're building this. It'd be impossible.

The equity strategies started out as retail mutual funds. Is there institutional interest? We've been bringing them to institutional clients and we now have some institutional separate accounts. ... As you know many institutional investors do want to see multiyear track records. On the retail side with the mutual funds, there's less of a gating factor to meet the track record. So we started out with funds, have some separate accounts, and as we continue to build our track records, expect that institutional side to really grow.

Are consultants saying: “Come back when you have that track record?” We've seen a wide range of responses. There have been some institutional clients that say, “We've known PIMCO for 20 years, we trust PIMCO, we're ready to go right now.” In fact, we had one institutional client tell their consultant, “We're doing this. You need to come up to speed, OK?” In the other extreme, some say “Hey, we need to see a three-year track record before we can really study this and vet it.” And both perspectives we completely understand. Then there are some who are in the middle. And so we're approaching all of them and giving them all the data so that when they're ready, they can make their own decisions.

Your equity strategies are all global. Why? What's very important is that all our strategies are global, because all of our strategies are combining rigorous bottom-up individual company analysis with PIMCO's global economic views and bringing those two things together. And that to us is what is setting PIMCO apart from other active equity managers that are focused just on the bottom-up (view). A lot of them are ignoring top-down; we think they're both important. So these are fundamental strategies buying companies stock by stock by stock.

Now, it's important to note we think the market is in transition. Coming into the financial crisis, equity investing was really focused on style boxes — large cap, midcap, small cap, growth, core, value — style boxes, right? We think that didn't work very well in the crisis, and in the future the world is going to be less focused on narrow style boxes and more on global unconstrained investing.

What do you mean by that? Go anywhere around the world; forget what's in the benchmark. Just find the best ideas and concentrate in those. And so all of our strategies that we've rolled out are global. They're fairly unconstrained relative to benchmarks. They're all looking at buying stocks at a cheap price, but they're also focused on downside protection because there's a lot of macroeconomic risk out there today. We think limiting some of the downside is important to successfully investing in equities over time.

How do you limit the downside risk? A number of different ways. If you look at the deep value strategy, part of the way they're doing it is buying stocks at a very depressed price. So you get a margin of safety there. They also do things like, one of their top holdings ... is gold — the GLD ETF — because they think that gold is an attractive hedge against some of these different shocks that are out there. We also use something called tail risk hedging in some of our equity strategies. And that means going around the world and finding cheap, out-of-the-money options to protect against big drawdowns. So you could buy puts on an equity index, you could buy currency instruments, you could buy credit instruments. We have a team of specialists at PIMCO who look all around the world for cheap insurance, effectively, to hedge our portfolios against some of these major shocks that keep hammering the global markets. These are things we're embedding in some of our equity strategies to limit some of the downside.

Why invest in the equities markets now? If you look at the economic environment we're in right now with negative real interest rates, you know dividend-paying stocks are offering some very attractive returns relative to what you can get in core fixed income. And so if you think about what the Federal Reserve is doing to interest rates, equities become very important as well.

Face to Face, Pacific Investment Management Co., Equities, Fixed income, Mutual funds,