From the early 1980s until earlier this year, the US ten year bond yield has steadily fallen – from 15%+ in 1980 gradually to 1% at the height of the Covid panic. This created not just a 40-year bull market in bonds, it also created a swathe of gigantic asset classes such as junk bonds, private equity, venture capital, and the asset class from which the team at Marcellus earns its fees, Emerging Market equities.
However, now that this four decade long bull market is ending, what does it feel like to at the epicentre of the new bear market? Brooke Masters’ entertaining story focuses on Pimco, the world’s largest bond manager which is headquartered in Newport, California.
The moral of the story is that it is actually a good thing that the bond bull market is dead: “Investors have pulled a combined $100bn out of US bond mutual funds and exchange traded funds this year, according to the Investment Company Institute. If the trend continues, it would be the first year of negative flows since 2013.
“The long bull market run in bonds has come to an end,” says Scott Minerd, global chief investment officer at Guggenheim Partners, who helps oversee $325bn in assets.
Nowhere are the prospects of a downturn being more closely watched than at Pimco, the California-based group that pioneered active bond trading.
Pimco’s expertise allowed it to profit from decades of falling interest rates and to spin gold from the wreckage left by the 2008 financial crisis. As the world’s largest credit-focused manager, Pimco came to symbolise the bond market boom.
But even before the surge in inflation rattled the bond market, Pimco was already having to swim against two very powerful tides. Watching the rapid expansion of cheap index-tracking funds, even some bond investors have begun to question the fees they pay to active managers such as Pimco.”
Pimco’s management were smart enough to see that the end of the bond bull market is coming. So, over the past five years they have successfully diversified the company after ousting Bill Gross, their legendary former CIO who was the king of the bond market: “Since then, Pimco’s chief investment officer Dan Ivascyn, who rose through the ranks, and chief executive Manny Roman, who was recruited from Man Group in 2016, have radically revamped the asset manager while maintaining the focus on credit that made it famous.
Lower key in style, they toned down Pimco’s emphasis on stars, sought to professionalise management and have tried to diversify globally. A failed expansion into equities was pruned back, while resources were ploughed into higher-fee alternative and private credit strategies for big investors who were willing to sacrifice short-term liquidity for better returns. The staff is one-third larger at 3,150-strong, and two-thirds of them have joined Pimco since 2016.
Last year, assets under management finally surpassed their Gross-era peak of $2tn. “Pimco hasn’t been nearly as high profile, but the big picture is that the business is healthy and the investment experience has still been very good,” says Eric Jacobson, a Morningstar strategist.”
What’s even more interesting is how the post-Bill Gross management team has dealt with the behavioural and cultural issues created by Bill Gross and the bond bull market: “Many employees attracted by Pimco’s record of success found Gross’s fondness for vigorous arguments and his need to dominate challenging. “Bill really tried to run an army. There were certain expectations of everyone,” remembers Sonali Pier, who joined in 2013 and last year won a Morningstar “rising talent” award for running one of Pimco’s top-rated funds. Now, “there is some uniformity, what’s the Pimco view or preference or tilt, but there is also some room for freedom of expression.”
To illustrate the shift, she and almost every longtime employee cited the changes Ivascyn made to the way Pimco shares investing ideas. For years, Pimco roughly three times a year has asked every investing professional to put forward their three best ideas and then collated the results into a book that is shared around.
Ivascyn reworked the structure of the book. Rather than being grouped by author, the suggestions are listed without attribution. To find out who proposed a particular strategy, readers have to flip to the end notes.
“The implicit bias [in the old way] was that you would tend to gravitate to the person and the idea based on whether or not you like that person,” says Mohit Mittal, portfolio manager for multi-sector strategies. “Now you cannot really guess who the idea is from unless you like [it] and you have to make an effort to find out whose idea it was. That allows for actively seeking out diverse opinion.”
A strong believer in behavioural economics, Ivascyn has run one of Pimco’s most successful funds since 2007. In meetings, colleagues say he deliberately avoids dominating the conversation, often speaking last after others have expressed their opinions. “My title is group CIO but it’s far different than the previous leadership structure . . . I am part of a team of professionals,” Ivascyn says.”
The bond bull market created a macho arrogant culture and Pimco’s management team seems to had had success in challenging & changing that culture: ““It’s deeply concerning for me personally and as a leader as well, that some people feel this way. I think we’ve taken that very, very seriously and wanted to really understand what’s there. It’s been honestly a little bit of a disconnect for me because that has not been my experience,” says Kimberley Stafford, a 22-year Pimco veteran, and one of four women on the 11-member executive committee, although the investment leadership is all male. “The culture has definitely changed,” she says.
A former employee, who spent more than five years at Pimco before leaving for a new opportunity, agrees. “I do think they make a concerted effort to combat the biases that exist in the financial sector. It’s the least ‘boys club’ of the four financial firms I have worked at,” he says.”
All of this seems to be bearing fruit – even though the bond bull market is dead and although their demigod fund manager was shown the door, Pimco has been able to beat the benchmarks by a healthy margin: “Pimco’s public fixed income funds have typically outperformed the market, even after deducting the higher fees they charge — on average, over the past five years, they beat their category rivals by 0.44 per cent annually, according to Morningstar Direct. The flagship Income Fund does even better, outperforming by an average 1.73 per cent annually since 2014.”
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