August 19, 2003

Pimco All Asset Shies From Stocks

An edited excerpt from the Aug. 18, 2003, edition

It may be called Pimco All Asset Fund, but in its brief one-year life, it has been more like an "all asset but not much stock" fund. And so far, that approach has provided mixed results to its investors.

As the name of the $462 million fund suggests, portfolio manager Robert Arnott has wide latitude to shift his portfolio among different markets in search of strong returns. The fund invests not in individual securities but in shares of other funds sponsored by Pacific Investment Management Co., or Pimco.

The fund is allowed to have as much as 50% of its portfolio in stocks, but since Pimco All Asset was launched in July 2002, Arnott, who is chairman of money manager First Quadrant L.P., hasn't even come close to that figure. While the fund's stock exposure has sometimes topped 20%, Arnott says he now has just 7% of fund assets in U.S. stocks.

Looking at current market conditions, Arnott -- the first outside "subadviser" hired by Pimco to run one of its funds -- says "the run-up in bond yields is not helpful to stocks." As a result, "we've been paring back our equity holdings in the last week or two," he says, and shifting more into the inflation-indexed Treasury securities that have been the fund's biggest holding all along.

Still, Arnott says the fund is on track to meet its primary goal -- delivering a return that exceeds the rate of inflation by at least five percentage points. Inflation has recently been running a little over 2%, suggesting an annual return target of 7% or so.

After launching All Asset as a product for institutional investors last year, Pimco recently began offering various share classes of the fund to individual investor (with higher annual expenses ranging from 1.5% to 2.25% versus 0.85 on the institutional shares).

Louis Stanasolovich, a Pittsburgh financial adviser who has directed some clients dollars to Pimco All Asset, likes that the fund acts similar to so-called global macro hedge funds in looking across a wide range of assets in search of return. "We think it's going to be a strong vehicle going forward," and one that may not move in lock step with other funds and stock market benchmarks.

Arnott agrees that the fund is similar to a hedge fund in some ways, including a goal of delivering solid returns that aren't closely correlated to the performance of standard stock and bond benchmarks. But unlike many hedge funds, he notes, the fund doesn't use leverage and doesn't engage in short selling or betting that securities will fall in price.

Arnott says Pimco All Asset is one response to concerns that traditional stock and bond investments may not deliver as much return in coming years as investors hope. The fund manager, who largely relies on quantitative models to plan his portfolio allocation, believes both stocks and bonds are likely to generate returns over time that average 2.5% percentage points a year over inflation.

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