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Fund name: PIMCO Global Multi-Asset, ("D" class shares) (PGMDX) (Update)

Objective: The fund tries to outperform a traditional 60/40 hybrid while hedging against unlikely but potentially catastrophic market events. This is largely a fund of PIMCO funds, but it does have the flexibility to invest in non-PIMCO funds and a range of other securities.

Adviser: PIMCO, a unit of the German financial services company Allianz. PIMCO is, most famously, a fixed-income shop and home of Bill Gross, the world’s leading bond investor. More broadly, they’re a leading global investment management firm with $800 billion in assets (9/30/08) and more than 1000 employees in offices in nine countries. They were founded in 1971 and manage separate accounts for phenomenally rich people (minimums range from $25 million - $75 million), 60 institutional mutual funds for the merely rich ($5 million minimum) with a bunch of investor-class shares (A, B, C, D and R) for us po’ folks.

Manager: Mohamed El-Erian, Vineer Bhansali, and Curtis Mewbourne. Dr. El-Erian is a co-CEO and co-CIO of PIMCO. He joined PIMCO in 1999, and re-joined it in 2008 after serving for two years as president and CEO of Harvard Management Company, the group that manages Harvard’s endowment. He’s got a PhD in economics from Oxford and an undergraduate degree from Cambridge. (Show-off.) Dr. Bhansali is a managing director and head of analytics for portfolio management. Prior to joining PIMCO in 2000, he was a vice president in proprietary fixed-income trading at Credit Suisse First Boston. He has a Ph.D. in theoretical particle physics from Harvard and an M.A. in physics from Cal Tech. (Show-off.) Mr. Mewbourne is a managing director and "generalist portfolio manager" and has only a bachelor’s degree from the University of Pennsylvania. (Ahhhh. . ..) El-Erian leads the team and sets the fund’s asset allocation. Bhansali handles risk management and Mewbourne oversees "alpha strategies" and provides pastries at the staff meetings.

Management’s Stake in the Fund: None yet recorded. In general, PIMCO managers have little or nothing invested in their funds. The notable exceptions to that rule are Bill Gross (over a million in Total Return), Bob Arnott (over a million in All Asset All Authority) and Mr. Mewbourne (over $100,000 in each of the two other funds he manages). On the upside, every board member has over $100,000 – generally way over $100,000 -- invested in PIMCO funds.

Opening date: September 15, 2008.

Minimum investment: Varies by share class. The "D" class shares (PGMDX) commonly available in retirement plans have a $5000 minimum.

Expense ratio: 2.24% on assets of $3.1 million.

Comments: Investors often lament the obscurity of Bill Gross’s discourse. I don’t know whether Mr. Gross, PIMCO’s CEO and only "star" manager, has infected the others or if he’s a victim of some bizarre verbal virus rampant at PIMCO HQ. In any case, the explanations surrounding Dr. El-Erian’s much-heralded new fund are painfully dense. One might imagine that a company would have a simple answer to the question, "what am I supposed to do with this fund?" Silly you. Here’s El-Erian’s explanation:

The Global Multi-Asset Strategy is intended to be an important part of a complete portfolio solution for clients . . . Investors should view this strategy as part of their total investable assets, rather than applicable to a narrow bucket within an asset allocation. . . we anticipate that most investors might apply the strategy to a portion of their approach to all asset classes, [while] some might simply use it as a tactical component of a more static policy-driven allocation.

Uhhh . . . Deploying my hard-earned Ph.D. in rhetoric, I think he just said "most folks will use this as a core fund, while a few might find it useful as a hedging strategy." If you were to be aggressive and ask, "are you sure?", I’d return to "uhhh. . ."

There are two arguments to consider. First, PIMCO believes that the world has changed in a fundamental way. A heavily-edited version of Mr. Gross’s November 2008 commentary is actually reasonably clear on this point:

I heard a brilliant, high-IQ portfolio manager describe himself on the radio a few days ago as a "child of the 25-year secular bull market–trained to buy on dips." In fact, we all are bull market children. But those that define it by "dip buying," or a secular time frame encompassing only the past quarter century, are certainly self-limiting and perhaps lacking in common sense. The era now coming to an end is not a one-generational bull market that was born out of the ashes of double-digit inflation, and the end of governmental strangulation of private initiative in the early 1980s. It was much more, and much longer in duration.

The past era can best be described as a more than half-century buildup in credit extension and levered finance. . . (emphasis in the original) at some point early in the 21st century, things began to go terribly wrong with this miracle of modern finance. It was spreading substantial benefits via diversification and [leverage] . . . But it had assumed an arrogance that nothing could go wrong. It was promoting not just smooth sailing–a moderation–but a "great moderation." Unstoppable. Except, of course, [then] . . . our great moderation was exposed for what it was–a naked swimmer at high tide.

The post-war monetary arrangements which allowed for steady growth and only moderate declines has, they argue, come unraveled and owning 12 different assets classes does you no good when 11 of them decline simultaneously. PIMCO hopes that their new fund "can help position investors for secular transformations in the global economy that are challenging traditional asset allocation approaches by providing exposure to a very wide range of global asset classes."

Second, the fund’s managers propose to prosper in this brave new world by applying a three-layered process. They are:

  1. Develop the asset allocation using a system that mixes qualitative, big picture judgments with quantitative models. They’ve been doing this with their bond funds and argue, reasonably enough, that debt and equity are not separate creatures. Both are part of a corporation’s capital structure, so understanding one requires understanding the other.

  2. Seeking "alpha" by looking for opportunities arising from "short-term market dislocations as well as from longer-term structural inefficiencies."

  3. Hedge against severe outcomes by making those hedges part of the permanent strategy. PIMCO argues that you can’t adopt a "just in time" strategy for such outcomes. That is, you can’t have a portfolio built on a simple all-long strategy and expect to detect a storm and create hedges just before the storm hits. The hedges have to be part of the on-going portfolio building process. The plan is to continually stress test the portfolio against a variety of "extreme scenarios" and then assess the consequences of hedging against each. Since each hedge (Treasuries, Eurodollar futures, options and "swaptions," VIX futures or cash) comes at a cost, the team will try to arrange a mix that "balances costs and potential payoff."

There are three risks to keep in mind as you assess the attractiveness of the fund:

Bottom Line: I often think of PIMCO in company with GMO, another famously innovative institutional investment firm. PIMCO, like GMO, is a very successful manager which mostly serves clients who are intolerant of marketing hype. And they’ve served them well: 19 of their 40 funds have earned 4- or 5-star ratings from Morningstar. PIMCO, unlike GMO, does not have a long tradition of developing and executing complex, global, hedged multi-asset strategies. PIMCO, like GMO (and, okay, Enron), employs some frighteningly smart people. PIMCO, unlike GMO, is easily-accessible to retirement investors.

If you’re fearful that the current dislocation signals a permanent shift in the investment environment, it would be prudent to configure at least a part of your portfolio to profit from, or hedge against, those changes. Those hedges – whether delivered by PIMCO, Leuthold, Nakoma, or others – are expensive but, used in moderation, might serve a valuable psychological function in allowing you to clench a bit less and plan a bit more.

Fund website: PIMCO Global Multi-Asset. This link is specific to the "A" class shares. You can change share class through a little drop-down menu located just above the "At a Glance" box.

December 1, 2008

Update (posted July 1, 2010)

Assets: $2.2 billion Expenses: 1.42%
YTD return (through 6/17/10): (0.1%)
Our original thesis: "This isn’t PIMCO’s core competency."

Our revised thesis: The case for this fund is not yet proven. The fund’s objective is to outperform simple 60/40 hybrid funds while protecting against rare but catastrophic "black swan" (or red herring, or was it pink flamingo?) events. It would do so by identifying potential risk factors (deflation, federal debt default, collapse of the yuan) and building in hedges against each. So far, it hasn’t particularly distinguished itself.

The fund was launched in October 2008, near the end of the market collapse. Between inception and the market bottom, it outperformed a series of reasonable benchmarks (Vanguard’s Balanced Index Fund VBINX, its "world allocation" peer group, and a domestic hybrid peer group) for the period between Thanksgiving and New Years. Otherwise, it paralleled them during the meltdown and trailed substantially during the subsequent bull market. During the May 2010 mini-crash, it did no better than simple stock/bond hybrids though it was a tiny bit better than the world allocation group. Overall, it has trailed all three groups since inception.

In the face of a series of really bad events, this fund has not yet shown any special dexterity. It may be that an investment here will pay off brilliantly in the face of some future bolt from the blue, but it hasn’t yet. In legal terms, the judgment is a Scotch verdict, "case not proved."

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