The performance tables have turned for the nation’s two largest bond managers.
Following the recent credit crunch and a dearth of liquidity, PIMCO’s core and core-plus strategies have been getting a performance boost while the core and core-plus bond portfolios run by WAMCO have taken a hit. (Over the longer term, however, WAMCO remains ahead.)
Industry watchers said Pacific Investment Management Co., Newport Beach, Calif., anticipated the market turmoil by underweighting credit risk and avoiding subprime mortgage risk.
Western Asset Management Co., Pasadena, Calif., generally takes on more credit risk with higher allocations to high yield in its portfolios than PIMCO, consultants said.
The strategies are led by the firms’ chief investment officers — PIMCO’s William Gross and WAMCO’s S. Kenneth Leech.
“PIMCO has not been comfortable with credit for several years now,” said Keith Berlin, senior research analyst of fixed income at consulting firm Fund Evaluation Group LLC., Cincinnati. “They need to get credit for being right. They were definitely early, but they were definitely right.”
Year to date through July 31, PIMCO’s $223 billion Core Plus Total Return Full Authority strategy returned 1.82%, according to data provided by the PSN investment manager database of Informa Investment Solutions, White Plains, N.Y. PIMCO’s $11 billion Total Return Core strategy returned 1.72% for the same period.
The core-plus strategy outperformed the Lehman Aggregate Bond index by one basis point, while the core strategy underperformed the same benchmark by nine basis points.
By comparison, WAMCO’s $93 billion U.S. Core Full (or core-plus) strategy returned 0.41% year to date through July 31; the $33 billion U.S. Core strategy returned 0.73%. The core-plus and core portfolios underperformed the Lehman Aggregate by 140 basis points and 108 basis points, respectively.
Favoring short-dated bonds
“PIMCO has long believed tighter global monetary policy would lead to a cyclical economic slowdown, led by the U.S. housing sector. We have favored short-dated bonds, based on our expectation that the Fed and other central banks would begin to reverse their tightening stance as an insurance policy against a more severe slowdown,” Christian Staub, product manager for the total return strategy at PIMCO, said in an e-mail response to questions.
“We have also maintained a conservative portfolio stance overall, based on our concerns that risk assets were not appropriately priced for potentially slower growth,” he said.
When the markets were rocked in mid-July, PIMCO was proven right, but only after months of being wrong. “For over a year, PIMCO’s view on the economy and the Fed were looking really wrong,” said Paul Herbert, senior mutual fund analyst at Morningstar Inc., Chicago.
At PIMCO, the top-down view generally plays a larger role in performance, whereas with WAMCO, it’s more of a credit story, said Mr. Herbert.
“With (WAMCO’s) core and core-plus, their high-yield exposure was in automotive and automotive finance companies, which have not performed well in the near term,” he said.
Indeed, Michael Rosen, principal and chief investment officer at consulting firm Angeles Investment Advisors LLP, Santa Monica, Calif., said Western Asset’s overweight positions in mortgages, credit and high-yield and asset-backed securities canceled out what portfolio managers might have been doing right.
WAMCO officials don’t seem concerned by the short-term performance issues; a spokeswoman stressed the firm’s long-term performance focus. “We are pleased that the core and core-plus funds have outperformed their respective categories over most time periods and all market cycles,” said Mary Athridge, spokeswoman at WAMCO parent Legg Mason Inc., Baltimore.
“Western Asset seeks to deliver value to shareholders over market cycles, and the team has extensive experience managing through difficult markets,” she said.
Mr. Rosen pointed to a period in 2002 when WAMCO was hit hard by the Enron Corp. and WorldCom Inc. meltdowns. “Western had some exposure there and their performance was pretty bad for two quarters, maybe less, but they came roaring back,” he said.
WAMCO ahead
Over longer periods, WAMCO’s core-plus and core strategies are ahead of PIMCO’s.
In the three years ended July 31, WAMCO’s core-plus strategy returned an annualized 4.9%; PIMCO’s returned 4.5%. In the same time period, WAMCO’s core strategy returned 4.17% annualized; PIMCO’s, 3.94%. The Lehman Aggregate returned 3.92%.
One client of both firms said it’s too soon to tell if PIMCO will gain assets or if WAMCO will lose assets as a result of the recent performance shift. “It’s difficult to say. One style tends to be more in favor than the other. That’s an issue dictated by the current market environment,” said the client, who requested anonymity.
“If you’re really smart and you can foresee which style would be favored at a certain time,” then clients may change their mandates, he said, although he acknowledged that to be an unlikely scenario.
Mr. Rosen said: “I am certain that anyone who has money with PIMCO expects this to continue,… (but) anyone who fires WAMCO at this point is making a big mistake.”
