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A PIMCO Update

October 2, 2014

PIMCO, a $2 trillion asset manager, is the manager of several funds we utilize in Savant’s portfolios (PIMCO Real Return, PIMCO CommodityPLUS, PIMCO Foreign Bond, PIMCO Total Return III, PIMCO Low Duration III).

On September 26th, co-founder and Chief Investment Officer (CIO) Bill Gross abruptly left PIMCO for another asset manager (Janus) to start a new bond strategy. It was widely known that Bill Gross, being seventy years old, would retire sometime in the coming years, and succession planning was underway. However, this announcement was unexpected and comes on the heels of other personnel changes at PIMCO this year. As we wrote in a previous commentary, significant changes in leadership have placed this firm on our Investment  Committee’s watch list. We are actively monitoring the changes within the firm and any potential impact on fund performance.

Who will replace Bill Gross as CIO?
The succession plan being put into place was fast-tracked last week. Earlier this year, PIMCO appointed six deputy CIOs as part of the succession plan. The deputy CIOs were selected due to their extensive backgrounds/expertise within the industry and PIMCO. The intention was to promote one of the six to head the entire group as CIO. On Friday, the firm selected Dan Ivascyn. The five others were formally assigned to specific areas of research in the firm as shown below:

Leader

Position

Year Joined PIMCO 

Daniel Ivascyn

Group CIO

1998

Mark Kiesel

CIO Global Credit

1996

Mihir Worah

CIO Real Return & Asset Allocation

2001

Andrew Balls

CIO Global

2006

Scott Mather

CIO US Core Strategies

1998

Virginie Maisonneuve

CIO Equities

2014


Three of the individuals listed above as CIOs (Ivascyn, Kiesel, Mather) have worked closely together at PIMCO for the past 17 years. Mihir Worah and Andrew Balls have also been part of the PIMCO team for many years. Virginie Maisonneuve is new to PIMCO and was chosen to add more capability in the equity asset classes.

In addition, two notable leaders have recently re-joined PIMCO and are actively involved in the firm’s investment committee and portfolio management process.

  • Paul McCulley re-joined PIMCO in May 2014 as chief economist and a regular chair of the investment committee. He was with the firm until 2010 and was credited with avoiding some of the worst of the carnage of 2008.
  • Chris Dialynas, an important member of the investment committee, announced last week he is returning from a one-year sabbatical early. His tenure dates back to the early days of the firm in the 1970s.

More Detailed Thoughts
We do not think this is a reason for panic or a knee-jerk reaction. Unlike some investors, Savant did not select PIMCO as a manager because of Bill Gross alone but because it is a firm with a deep bench and expertise in specific areas such as inflation bonds, foreign bonds, and commodities. While Bill Gross has been the public face of PIMCO for years, he leaves behind a very large staff of talented analysts and managers that he hired and trained for many years. Now that staff has stepped up to take on important roles after his departure.

Every company, large and small, has to do succession planning. Ideally, it is well-planned and well-timed. In PIMCO’s case, it appears well thought out, but the timing was not ideal. We believe PIMCO is addressing the departure of Bill Gross (and Mohamed El-Erian earlier this year) in a reasonable manner. Furthermore, their investment committee which guides all of their strategies may be more well-rounded going forward, as these changes will give voices to other prominent PIMCO leaders.

Bill Gross’ leaving will certainly have an impact on the firm, but the extent to which it does is too early to tell. Savant, and many other investors, will have PIMCO on the watch list or under review for some time. Morningstar, an industry leader in fund research, has placed all 50 strategies at PIMCO "under review." Savant has done and will continue to do frequent reviews of the portfolio data, on-site due diligence at PIMCO, and regular conference calls with relationship and executive management teams.

If there are considerable redemption requests from their flagship fund (PIMCO Total Return Fund) managed by Bill Gross, we do not expect it to be a big issue due to the bulk of the holdings being in liquid Treasuries or U.S. Government-related exposures (approximately 42%) and an additional 3% in money market/cash equivalents. This is a fund that invests in very liquid assets and the size of the fund is large in total dollars but not too large relative to the size and volume of the global bond market.

While we cannot predict what will transpire in the coming days, weeks, and months, we believe PIMCO is well-equipped to provide any necessary liquidity as they have done in previous difficult times such as the 2008-2009 financial crisis.

What Has Not Changed?
PIMCO will continue to use the same global macroeconomic (top-down) strategy to formulate firm views for the short- and intermediate-term periods. This entails holding formal quarterly and annual forums where the firm’s 240-person portfolio management team provides input. The investment committee then uses those views to set the tone and strategic direction for the portfolio strategies.

In sum, the firm has a strong team and process in place, but there is uncertainty related to how all the changes will mesh. This will keep PIMCO elevated in our due diligence of the firm.

Should you desire more details or have questions please contact your financial advisor.

 

 

 

 

 

 

 

 

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