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Inside the Evolution at PIMCO

Mihir Worah says some changes to PIMCO's Investment Committee have been subtle and some obvious, including the incorporation of analytics, risk management, and specialist input into the process.

Eric Jacobson: Hi, this is Eric Jacobson for Morningstar. I'm here today at the Morningstar Investment Conference 2016, and I am with Mihir Worah, who is a senior portfolio manager at PIMCO and we'll get into that in a second because he's got a lot of different responsibilities that have evolved over the years.

Mihir, thank you so much for joining us today.

Mihir Worah: Thanks, Eric. It's a great conference and good to be here.

Jacobson: We're happy to have you. So over the last couple of years, your responsibilities have evolved. In the past you had been primarily focused on TIPS and real return. I want to say about two years ago you became one of a handful of chief investment officers. And obviously sitting on the Investment Committee and so forth. Can you talk a little bit about, since the changes to the Investment Committee, I think they really get started about January 2014? How has the dynamic evolved and how would you compare it to what it was like before that? I get it, you're not on it every day but obviously have a sense of what it was like.

Worah: PIMCO's Investment Committee has evolved over the last couple of years. Some changes are obvious and some changes are subtle. So the one thing that we haven't tried to change is the investment process which has been working for 40 years, why break something that's working. So it's the same investment process, but we've tried to improve it. So what's not changed is that the Investment Committee still meets four times a week. What has changed is Investment Committee each time we meet is led by different one of the CIOs either Dan, Scott, myself, Andrew, etc. This could be a regular rotation or based on what the topics are. If the topics are more macro or real rate-oriented, it would be me; if it's credit-oriented, Kiesel etc., etc. So that's one of the obvious changes.

The subtle changes we've made to the Investment Committee and to the investment process is we're really trying to incorporate both PIMCO's world-class analytics team led by Ravi and our risk managers led by Bill De Leon. So for example once a week, and typically it happens to be a Thursday, we have a formal risk review, where we go through not just the big-picture positioning across PIMCO portfolios, and the total return fund. But also individual strategies we'll pick--say emerging markets, real return, commodities, high yield. We'll do a deep dive, the Investment Committee will do a deep dive in those strategies presented by the individual portfolio manager accompanied by the risk manager. So the fact that risk management is incorporated into the Investment Committee is a change. 

And the third change and I think we've talked about it before is really empowering the specialist at PIMCO. We've got 250 different portfolio managers specializing in different areas of the bond market. While they have been feeding their inputs into the Investment Committee before. Now they are just much more empowered to come and to present to the Investment Committee and have productive two-way dialogue. So while large parts of the investment structure are unchanged, I'd say the two changes are, one is the incorporation of analytics and risk management into the investment process and incorporation of specialist inputs more into the investment process.

Jacobson: So let me switch gears on you for a second and move over to total return. We've talked obviously a lot before about how things have evolved in terms of the new management structure. It is you and Mark Kiesel and Scott Mather as the name of the managers. Talk to us a little bit about the breakdown of responsibilities among the three of you and how that's evolved since the three became comanager of the fund.

Worah: So the first and most important thing is as all three of us are comanagers, we all have an equal say into the positioning of the fund. But it's not just us, at the end of the day the total return fund is an expression of PIMCO's Investment Committee. So all of us are meeting as we just discussed four times a week as part of PIMCO's Investment Committee and giving our feedback and incorporating that into the positioning of the total return fund. But on a day-to-day basis, it's kind of evolved, it was expected and it has evolved in that way that Scott is really the day-to-day manager of the total return fund. It turns out that Mark leading the credit effort and me leading the real return and the asset allocation effort have day jobs.

While our investment framework, there is one investment framework are rates going up or down, is credit attractive or not, which currency is attractive. So while there is one investment framework, we do have a day job watching other areas of PIMCO while Scott is primarily focused on the total return fund. On a day-to-day basis, small changes. Scott will make them, I talk to Scott, all the time, we sit close to each other, we talk to Mark. But if there are small changes in the portfolio Scott will do those and let us know after or before. If there are big shifts in portfolio strategy that's certainly a joint decision and then also in terms of the way the portfolio is structured the total return fund is a U.S. core bond--core plus bond fund. It's one-third treasuries, one-third credit, and one-third mortgages and that kind of fits in well with our skill set, too.

I have been--I am the head of PIMCO's Treasury area. So I am kind of responsible for the Treasury exposure and the TIPS exposure. Mark, the credit exposure and Scott's background was working his way up through PIMCO's mortgage desk. So certainly--and then running our global bond areas. So certainly in mortgage area currency, some of the more global topics are Scott's expertise, Treasuries and derivatives are my expertise, credit is Mark's expertise. So I think it's working great. Scott does the day-to-day management and the three of us speak every day, the Investment Committee formally once a week every Friday we meet to go over the fund. But also obviously informally we are talking all day along. It's worked out really well.

Jacobson: So let me switch then to the fund itself and ask you this. Obviously strategy as we talked many times is really the same as you mentioned before, PIMCO has sort of an embedded style and culture and so forth. So I understand that there isn't anything big-picture that's changed about total return. But obviously you've got different people with their hands on the rudder at this point. What would you point to if anything about either the day-to-day tactical running of the fund, of way the fund has been positioned over the last year and half or so, that one might point to, well that’s an evolution maybe from how it had been before.

Worah: I think the evolution is more in the bottom-up construction of the individual bonds that go into the portfolio. The overall macro process hasn't changed much, and the other thing that hasn't changed much is our split between what we call structural sources of alpha. That PIMCO, liquidity provision, volatility provisioning, positioning on the term structure. Earning the credit risk premium all of those, the structural sources of return that we've been focused on and that's one of the strengths of PIMCO along with tactical positioning, betting on what the Fed is going to do. So that macro top-down positioning there has not been a lot of change in how the fund is managed. Where the change is in the individual security selection. So Mark has more of a say in the individual credits, while earlier again not to go back to the past, but when Bill Gross was managing the fund, Mark as the head of credit would have some input but at the end of the day Bill would make his own decisions. Now Mark can decide exactly which credits go in, I can decide exactly where on the TIPS curve for example the total return fund has a position, it has an overweight, has a position in corporate bonds, has a position in TIPS and it's exactly which securities you buy that the specialists and the individual portfolio managers through the specialist teams we lead are having more of an impact. So at the macro level you wouldn't see much of a change in the style of the fund. But at the micro level the big changes in the individual securities that make up the fund.