Pacific Investment Management Co. LLC has already garnered about $4 billion for its active equity strategies, only about a year after its launch.
While a three-year performance record is usually a ‘must’ before consultants and investors consider a manager, PIMCO’s case is different, according to several consultants who spoke on the condition that they not be named. The firm’s established money management process, well-understood investment culture and global resources helped convince consultants and investors alike, one consultant said.
At the same time, clients are paying more attention to downside risks — a focus that could benefit PIMCO’s portfolio risk management process as applied to equity strategies, others said.
“Everyone is looking at risk management, in all strategies and all portfolios,” said Cynthia Steer, New York-based managing director of investment strategy at Russell Investments. “This is an appropriate and important task” that will benefit certain managers with proven expertise in managing risk.
While declining to comment specifically about PIMCO, citing company policy, she added that “it is in this context of risk management and overall holistic governance that institutions are trying determine what are the risks that they’re willing to take and the risks they will not tolerate.”
As of June 30, assets under management in the active equity division of PIMCO totaled $4.1 billion. About $3 billion was invested in its Pathfinder Strategy, the active equity fund launched in April 2010, and the remainder in two emerging markets strategies launched in April 2011.
Within the next several months, the firm plans to announce the appointments of two additional portfolio managers to run a new global income strategy, Neel Kashkari, managing director and head of new investment initiatives at PIMCO, said in a telephone interview. Mr. Kashkari declined to name the two.
Since inception, the Pathfinder portfolio added 6.31% compared to an 8.48% return for its benchmark, the MSCI World index. Performance data for the two emerging markets strategies — equities and multiasset, which uses a factor-based approach to asset allocation — were not available because they are new.
“One year is a very short time, but so far, our Pathfinder strategy has returned close to the benchmark at half the volatility,” Mr. Kashkari said.
The Pathfinder portfolio is fairly concentrated, typically with between 70 to 90 stocks, and managers take a “safe approach” to gaining equity exposures with the aim of generating positive returns rather than beating the benchmark, Mr. Kashkari said. As part of the downside protection strategy, managers can hold up to 25% in cash. “It also provides dry powder to deploy when markets correct,” he added. As of June 30, the fund has about 12% in cash.
“If you focus on the benchmark, the returns don’t tell the whole story,” Mr. Kashkari said, referring to a hypothetical situation in which a manager could be outperforming a benchmark but still losing money for clients. “A lot of managers define risk in terms of a benchmark. … But if you’re looking at the benchmark as an assessment of risk, that’s almost irrelevant in terms of whether clients are meeting their (investment) goals.”
Tail-risk hedging is also a main feature across all active equity strategies. A separate team dedicated to tail-risk hedging at the firm goes “all around the world looking for the most cost-effective way of getting the hedge we want for a particular strategy,” Mr. Kashkari said.
One of the most recent institutional clients for PIMCO’s multiasset emerging markets strategy is the $40.8 billion Alaska Permanent Fund Corp., Juneau. The APFC appointed both PIMCO and Capital Guardian Trust Co. to split a multiasset emerging markets portfolio valued at a total of $820 million earlier this year, according to information provided by the fund in a previous interview. The percentage split between the two not available.
“The objective of the strategy is to deliver best risk-adjusted returns in emerging markets, but portfolio managers are free to invest in a variety of asset classes, for example, investing in commodities to take emerging markets equity factor exposure,” said Maria “Masha” Gordon, executive vice president and lead portfolio manager in active emerging markets equity at PIMCO in London. She also manages the equity portion of the multiasset emerging markets portfolio.
PIMCO is considering adding a long/short offering to its stable of active equity strategies in the future. Another is a strategy of global stocks with high-dividend potential. “We’re very open-minded; it’s a matter of determining where we have the talent and the economic insights to provide an edge” over competitors, Mr. Kashkari said. However, one of the most challenging aspects of his job since the launch of the active equity business at PIMCO has been finding talent, he added.
“We’re looking for (portfolio managers) with an investment approach that’s rigorous, repeatable, unique and insightful. Do they have hunger? We also evaluate whether the investment approach can be enhanced by tapping into the PIMCO process, because we don’t want to simply offer a ‘me-too’ product. Most importantly, they have to fit in culturally,” Mr. Kashkari said. “Finding all of those things in one person is challenging.”
For example, PIMCO hired Anne Gudefin and Charles Lahr from Franklin Templeton to manage the Pathfinder strategy. PIMCO didn’t change their methodology for finding deeply underpriced companies globally. “But now they’re getting all of PIMCO’s insights, for example on the interest rate environment all around the world, and that gives them a greater edge,” Mr. KashkaTempleton to manage the Pathfinder strategy. PIMCO didn’t change their methodology for finding deeply underpriced companies globally. “But now they’re getting all of PIMCO’s insights, for example on the interest rate environment all around the world, and that gives them a greater edge,” Mr. Kashkari added.
For the active equity team, PIMCO is using recruitment firms Russell Reynolds Associates, Spencer Stuart and Egon Zehnder International.
PIMCO is not considering expansion by acquisition because any takeovers would include “top performers and also mediocre performers,” Mr. Kashkari said.
“If we acquire a successful firm, what are the odds that the culture (of both companies) would match perfectly? Pretty low,” he added.
Ms. Gordon, who joined PIMCO in 2010, said she was lured by the “macro edge” in the firm’s investment approach, the continuity of leadership and the chance to build a product from scratch. Formerly managing director and head of global emerging markets equity strategy at Goldman Sachs Asset Management, Ms. Gordon now oversees about $1 billion in active emerging markets equity assets, including the equity portion of the firm’s emerging markets multiasset strategy.
“I was attracted to PIMCO because it’s solely an investment house run by investors,” she added.