Dispatch from Newport Beach
If the decades-long bull market in bonds is over, where does that leave Pimco? The world’s largest credit-focused fund manager was already having to swim against two powerful tides. Fees for active managers are under pressure due to competition from index-tracking funds, and the legacy of one of the most spectacular management bust-ups in the sector’s history.
My colleague Brooke Masters visited Pimco’s headquarters in the California coastal community of Newport Beach to find out how things have changed since founder Bill Gross noisily decamped to a rival firm in 2014 and what it is doing to adapt to the new inflationary environment. Turns out, Pimco has grown significantly, from 2,080 employees in 2016 to 3153 now, and expanded its offerings of alternative assets.
Chief investment officer Dan Ivascyn, who runs Pimco’s huge Income fund, and CEO Manny Roman, who arrived from the UK’s Man Group in 2016, have worked together to change the very confrontational, very male and somewhat chaotic culture that Gross presided over.
Ivascyn, a big believer in behavioural economics, has bumped up the use of data analytics to help the group spot opportunities and test whether its investment bets are working. The firm has also added a new outpost in Austin Texas to make it easier to recruit people with expertise in tech and more diverse backgrounds. And the two have also strengthened Pimco’s ties to its owner, Allianz — Pimco now manages a big chunk of real estate assets for the German insurer.
Working at Pimco is still no walk in the park. Employees describe the atmosphere as “demanding”, “driven” and “edgy”, especially when compared to other asset managers. Sonali Pier, one of its portfolio managers, puts it this way, “What I often tell hires is that you could do the job we’re hiring you for, but if you want to really strive for excellence, you’re going to go beyond that because there’s so much room . . . So we tend to find people who are eager to succeed.”
A ‘regime shift’ under way in markets
Guy Spier, chief executive at Zurich-based Aquamarine Capital, speaks for many dyed-in-the-wool value investors, when he describes how growth’s dominance over the past decade has presented an existential challenge.
“Growth investors looked at people like me, and thought oh you poor soul, you idiot, you just don’t understand how the world has changed.” Now, with signs of a broad shift in markets amid rises in interest rates, Spier said: “I do feel a certain amount of schadenfreude — it’s like, what the hell were you people thinking?”
Value stocks are providing investors some shelter from the storm sweeping markets, as portfolio managers seek out bargains and dump high-flying companies that have been in vogue since the wake of the financial crisis.
The renaissance started over a year ago, but the so-called value factor’s powerful rise in 2022 has reinforced belief that this is now a durable shift in market conditions. “There is a regime shift under way,” said Yoram Lustig, head of multi-asset solutions for Europe and Latin America at US asset manager T Rowe Price.
And nowhere is the tech stock hammering being felt more acutely than at Chase Coleman’s Tiger Global, the best-known of the so-called Tiger cub firms. Don’t miss our deep dive into the mauling of Tiger Global.
The fund disclosed last week it had slashed or dumped its holdings in prominent tech groups such as Netflix, Airbnb and Peloton. The value of its public stock positions fell from $46bn at the end of last year to just over $26bn at the end of the first quarter, reflecting both the divestments and plunges in the value of its remaining investments.
Coleman and Scott Shleifer, who looks after Tiger’s private investment funds, have been upbeat in discussions with investors, say people familiar with the conversations, arguing that conditions would eventually change and the tech sector’s long-term growth remained intact. We “know we will look back on this as one point in time on a long journey”, the firm told investors this month.
“I have full confidence that [Chase] will come back,” says Dixon Boardman, chief executive of Optima Asset Management who invests in Tiger. “I just don’t know how long it is going to take.”
Chart of the week
The world’s biggest funds focused on environmental, social and governance issues have been battered this year as their heavy weightings towards technology stocks has left them at the centre of a market squall.
Parnassus Investments’ Parnassus Core Equity Fund, with $25.9bn under management, has fallen by over 18 per cent in 2022 while Vanguard’s $14.3bn FTSE Social Index fund is down over 22.5 per cent. Technology is the top sector in both funds, making up 30 per cent of the Vanguard fund’s investments and over a fifth of Parnassus’. Other big ESG funds have also been knocked this year.
The gloomy performance marks a sharp contrast to recent outperformance of ESG funds, when big rallies in tech stocks during the pandemic helped boost funds focused on environmental, social and governance standards.
Tech has typically been a big part of ESG portfolios because their carbon footprints tend to be lower than peers in other industries, and they have policies in place on issues such as diversity and human rights, while making up an outsized proportion of public markets due to their huge size.
“Piggybacking on technology companies’ outsized gains in recent years has boosted the performance of large ESG funds in the past. Now they are suffering collateral damage as a result of the current shakeout in the tech sector”, said Amin Rajan, chief executive of think-tank CREATE-Research.
10 unmissable stories this week
The global head of responsible investing at HSBC Asset Management has drawn fire after accusing central bankers and policymakers of overstating the financial risks of climate change in an attempt to “out-hyperbole the next guy”.
A single portfolio manager at Capital Group drove an €8bn sell-off of European bank stocks this year, after the war in Ukraine and the threat of a global recession caused the investment giant to sour on the sector.
A three-decade golden era for globalisation risks going into reverse according to company executives and investors, as world leaders prepare to meet at the World Economic Forum in the Swiss town of Davos for the first time since the coronavirus pandemic began.
Sexual misconduct allegations at a prominent $47bn New York asset manager GoldenTree have ignited a multimillion-dollar legal dispute that offers a revealing insight into the inner workings of the business.
Reddit traders rejoice. Gabe Plotkin’s hedge fund manager Melvin Capital, which small traders cast as the villain of the memestock saga, has told clients it will wind down its funds.
Warren Buffett has put his aphorism to be “greedy when others are fearful” into practice, ploughing $3bn of Berkshire Hathaway’s cash hoard into a big bet on Citigroup during this year’s market decline.
Baillie Gifford, the Scottish fund manager known for its bullish stance on China, has warned of the risks to foreign investors from worsening US-China relations and that prospect that Beijing might impose on their investment gains.
Cash holdings among global fund managers have risen to their highest level since the 9/11 terrorist attacks in the US, according to a Bank of America survey, in a shift that reflects large investors’ worries about the deteriorating outlook for stock markets.
German insurer Allianz has agreed a $6bn settlement with US authorities under which its investment arm will plead guilty to securities fraud after a scandal at its funds business left investors nursing billions of dollars worth of losses.
Traders have yanked $7bn from Tether since the world’s biggest stablecoin last week briefly lost its peg against the US dollar, intensifying concerns about the assets that underpin the global cryptocurrency market.
And finally
Drawing on the artworks of the Wallace Collection as well as international loans, the Inspiring Walt Disney: The Animation of French Decorative Arts at the Wallace Collection in London highlights the exceptional talent and innovation of both Walt Disney Animation Studios artists and the creative pioneers of the French 18th century. Although separated by two centuries, the artists, craftspeople and animators all had the same ambition — to breathe life, character, and charm into the inanimate.