PIMCO in the Post-Gross Era
New leadership has built on PIMCO's strengths.
It's been more than three years since co-founder and CIO Bill Gross left PIMCO in September 2014. One of the central questions in the days and months that followed was whether the firm would see a change to its investment process under its new leadership.
A Familiar Approach, But With Some Important Tweaks
At a high level, the answer is no: The basic contours of PIMCO's investment process haven't changed. PIMCO still has a primary investment committee that meets four times a week and sets top-down guidelines for portfolio managers.
It also holds secular and cyclical economic forums in which the broader investment team distills, analyzes, and debates long-term and near-term strategy. The investment committee's membership, which was altered between the January 2014 resignation of Mohamed El-Erian and Gross' departure later that year to incorporate newly promoted deputy CIOs, continues to balance macroeconomic experts and fundamental bond-pickers.
That said, Dan Ivascyn--who effectively replaced Gross as head of PIMCO's investment team--has focused on identifying ways to improve the process that drives such behemoths as PIMCO Total Return (PTTRX) and PIMCO Income (PIMIX) as well as the firm's more specialized funds. That's meant adjustments to the overall investment committee framework. As a devotee of behavioral economics, Ivascyn has been intent on circumventing common psychological pitfalls such as overconfidence and confirmation bias. He began recording the views of forum and committee participants before and after discussions, for example, to measure more-subjective elements of the process. The goal is to understand the dispersion of opinions on a topic, as well as whether a discussion managed to alter or confirm participants' views. Ideally, the team can then assess when a climate of agreement or disagreement has led to decisions that produced better or worse outcomes and use that information to hone its process.
Wary of groupthink, Ivascyn has also made a point of seeking out contrarian views. For example, he has made room for a rotating group of three to four relatively junior team members to bring fresh insights to the investment committee each quarter. The team has also increasingly sought the views of external advisors, including but not limited to the global advisory board it set up in December 2015. That group is currently chaired by former Federal Reserve Chairman Ben Bernanke and includes other prominent global financial and political leaders, such as former British Prime Minister Gordon Brown and past European Central Bank president Jean-Claude Trichet. Even in its hiring of investment staff, PIMCO has expanded the net beyond the traditional pipeline of candidates from business school, where students are often taught similar ways of thinking, to capture those with technical skills that are less rooted in investment world orthodoxy.
Ivascyn has also promoted the use of quantitative analysis in the investment process as yet another safeguard against behavioral biases. As a result, the work of a quantitative analytics team led by Ravi Mattu has become more central to the investment process than it had been under Gross. When Mattu, who had previously overseen research efforts at Citadel and Lehman Brothers, first joined PIMCO in 2011, the quantitative research group numbered roughly 20 members--too small a collection to specialize, according to Mattu. But the team has steadily expanded--to more than 60 in 2017--and become more integrally involved with the investment process under Ivascyn's direction.
Making Risk Management About More Than Policing
Ivascyn has also changed the way the investment team works with the firm's risk management group, run by Bill De Leon. When Gross was in charge, the centralized risk team was more defensive in its approach, calling out managers when their portfolios stepped out of line. And to be sure, De Leon's team still performs intensive surveillance, running results through the investment committee weekly, and he also now has a dual reporting line up to the executive office as well as to Ivascyn, giving him an outlet for escalating concerns outside of the investment group. But Ivascyn has tried to employ risk management in a more strategic way overall since taking over the team. Each investment strategy now has a dedicated risk manager who works closely with portfolio management teams. According to Ivascyn, De Leon, and various portfolio managers, that specialization allows the risk managers to develop a deeper understanding of what constitutes risk in different markets, stay on top of how risks shift over time, and set parameters accordingly.
There's Always More Work to Do
We've generally maintained a favorable view of PIMCO's investment team and are encouraged by the improvements Ivascyn and his colleagues have made to an already strong investment process, but the firm still has room to improve in a few areas that we follow. For example, despite improved performance since late 2016, its Unconstrained Bond strategy has struggled to distinguish itself over the long term as it has passed through multiple hands since former lead manager Chris Dialynas stopped running it in 2013. PIMCO's emerging-markets bond funds had also experienced setbacks, suffering hefty losses amidst the broad sell-off in those markets in 2014 and 2015.
PIMCO hasn't generally settled for mediocrity, though. For example, under the leadership of Mike Gomez, PIMCO has realigned existing team members into more suitable roles and brought in external hires. Other improvements include the establishment of an emerging-markets portfolio committee to meet alongside the firm's standing Americas, European, and Asia-Pacific portfolio committees and the introduction of more specialization among team members. Finally, Gomez has insisted on making more time for on-the-ground country research.
All in all, PIMCO's resurgence is impressive. With the distraction of a leadership crisis and outflows behind it, the firm's investment team, which has remained remarkably stable and well-resourced, appears as focused as ever on delivering competitive results for investors in the years ahead. In many cases, the firm's resilience has led to upgrades, including for PIMCO Total Return, which showcases PIMCO's strengths across the broad global fixed-income markets.
Eric Jacobson has a position in the following securities mentioned above: PTTRX. Find out about Morningstar’s editorial policies.