Actively managed fixed interest way to go: PIMCO

Many managers are reviewing their investment strategies post global credit crisis are deciding to return to passive investment and government, bonds – but this is wrong, a well-regarded manager says.

Wednesday, February 17th 2010, 7:47AM



PIMCO, the world's largest fixed interest manager, has argued against this move.

"We believe that there is a serious risk that this "hind sight" driven trend towards passive management and government Treasury bonds is ill-considered and could result in a prolonged period of underperformance for investors."

PIMCO says there are regularly events which create market volatility and destroy wealth, however the credit crisis was more than this.

It argues that the credit crisis was so large investors saw the relationships between assets classes breakdown to the extent that strategic asset allocation goals were compromised.

This wasn't a normal event rather it was a breakdown "of the system" rather than "within the system", PIMCO says.

Some investors are treating the event as though it was a more regular downturn and are therefore making incorrect asset allocation decisions.

The trend to passive now evident appears to be "solving for last years systemic problem" preferring government debt and passive management due to the relative outperformance. This is an extremely risky approach, the Asset Allocation response effectively saying that "the credit crisis was a normal cycle event" and will be repeated regularly. It ignores the systemic market dysfunction, the official policy responses to prevent a reoccurrence as well as impending regulatory responses to further protect against a repeat.

PIMCO says the return of volatility to investment markets and genuine risk / reward premiums has increased the active management opportunities and also the need for active risk management.

Underperformance of active management in the years leading up to the credit crisis reflected the low volatility environment and absence of risk premia.

"That was when investors should have been passive and simply rode market beta," PIMCO says.

PIMCO says it is now time for active management of fixed interest assets. Its portfolio managers say they have "never seen as much active opportunity as they are seeing at present and this is part of the reason why the recovery in portfolio values has in many cases exceeded the losses experienced during the credit crisis despite risk premiums remaining elevated."


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