PIMCO: Equities Team Expanding; No Asset Bubbles

One of the firm’s new deputy CIOs talks new hires to expand PIMCO’s equity unit as bond king Bill Gross comments on long-term policy rates.

(April 30, 2014) — Virginie Maisonneuve, PIMCO’s new deputy CIO and global head of equities, revealed a plan to expand her investment teams as part of strengthening the firm’s equities arm, according to Reuters.

The former head of global and international equities at Schroders joined the bond shop in January after an ugly uncoupling of Founder and Co-CIO Bill Gross and former Co-CIO Mohamed El-Erian. Since then, she had been firmly pushing for the equities division to expand, a strategy Gross has signed off on, Reuters said.

“If you want to be a very large player in the equity market, you need to have commitment over a very long period of time, and that is what clients would look for—it’s just the way it is,” Maisonneuve said in an interview. “If you look at who has built sizeable platforms in equities, it takes time, 10 to 15 years, when people have been at it for 50 years. I’m not saying we’re going to wait 10 years before we do something. My ambition is high and I want to drive equities to a very sizeable level of assets, but that’s going to take time.”

PIMCO was unavailable for confirmation at time of press.

The firm, which has $1.94 trillion in assets under management, has had more than a difficult year. It’s flagship fund, Total Return, saw record-hitting outflows and a 0.5% decline in the past year, according to Bloomberg. In March 2014, Morningstar downgraded PIMCO’s stewardship rating from a B to a C, largely reflecting El-Erian’s abrupt departure and major changes in key personnel in the firm.

Focusing on bolstering the equity funds could help PIMCO stand back up on its feet, according to the firm’s CEO Doug Hodge.

“Yes, there is now a sense of urgency to develop our equity arm. We need to respond and we want to do that quickly, but we also have to maintain quality,” he said in an interview in March. 

Maisonneuve said she plans to hire 10 to 16 people to her unit to reach a total of 30 staff members across the firm’s New York, London, and Newport Beach offices, a size that resembles that of a boutique management firm. She also expressed her hopes of building hybrid equity products using PIMCO’s credit analysis expertise.

Gross, on the other hand, addressed the US Federal Reserve’s long-term neutral policy rate in a monthly letter to investors cheekily titled, “Achoo!” In it, he wrote PIMCO had calculated the policy rate at 2%, half the 4% median forecast put forth by the Fed’s policymakers in both March and December.

“If the neutral policy rate was 2% instead of 4% then bonds, instead of being artificially priced, would be attractively priced,” Gross wrote. “Instead of facing a nearly 100% certain bear market currently forecast by market mavens, bond investors could draw some comfort form a low returning yet less volatile future.”

This corrected calculation would assuage fears of bubbles, signifying that other assets such as equities and real estate are more fairly priced, he said.

“Current fears of asset bubbles would be unfounded,” Gross wrote. “A 2% neutral policy rate, however, is not a ‘win/win’ for investors. It comes at a price—the cost being a financial future where asset returns are much lower than historical levels.”

Instead, Gross recommended investors with appetite for higher returns should seek different risks through “alternative assets, hedge funds, levered closed-end funds, and a higher proportion of stocks vs. bonds in a personal portfolio.”

“In this period of high leverage it’s important to realize that the price of money and the servicing cost of that leverage are critical for a healthy economy,” he said.

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