Emmanuel “Manny” Roman, CEO of the $1.7 trillion Pimco Funds, is unapologetic for focusing on fixed income, and fixed income only.
“We do fixed income at a fair price, and we do it well,” he told an audience at the Morningstar conference in Chicago. “It’s a unique strategy that focuses on one side of the market.”
Nor does he think focusing on fixed income puts Pimco at a disadvantage — and he has no plans to expand into other markets.
“It doesn’t matter how much we manage,” he said. “All that matters is our long-term performance. [Even] in the last quarter of 2018, all our funds were up.”
He added that “one of the things you need to decide is what business you want to be in.” For example, Vanguard focuses on bringing indexes that are inexpensive to the public. “That’s a business model. At the other extreme is us … where we do everything from the mortgage world to the fixed income world to the muni world to the private credit world. And we do one thing well. We’re never going to be the biggest, but we do very well for clients, and that’s perfectly fine for us.”
He added that he thought people got into trouble when they “try to do a lot of different things. It has consequences. If you try to do too many things, you’ll always do one badly. You’ll always have risk you haven’t carefully thought about … and cost structure that explodes when you don’t invest in the right place.”
Pimco, which for the past 47 years has been at the top of its game in fixed income, and weathered the storm of former manager Bill Gross’ rocky exit, isn’t just sitting back on their laurels either.
For example, he said, in the last couple years they hired 360 people, 60 of those from Gurtin, which is “great” in the SMA municipal world. “They had a technology which we thought was pretty unique to SMA and would benefit all our businesses. Very quickly we thought this was a very easy niche we could do, so it that worked for everybody,” he said. He also said the cultural aspect was a match.
Why the SMA business? He said there were two reasons: utilizing municipals — which Gurtin had wide coverage of — especially for clients who lived in high tax areas like California and New York, “and, given what’s happening in terms of U.S. politics, municipals are attractive and there’s a tactical trade as far as owning municipals.” Another reason is “more people want SMA,” he said. He doesn’t see it replace the mutual fund business, “but it’s a nice thing to have, and for some clients it makes sense.”
Will passive management overtake active? He said on the fixed income side, they beat the benchmark by 1.5%. Further, passive for fixed income “makes no sense” because first, fixed income passive indexes have a turnover of 40%, so if a manager is trying to replicate the benchmark, they end up churning the portfolio. Also, he said that an advantage of active management in fixed income is that there are non-economic agents. “Think of the Central Bank,” he said. Bottom line, “all that matters to anyone in this room is if we can deliver net of fees long-term alpha consistently.”
He also sees the business being big or small, whereas those middle-sized businesses will have to merge. “Think the Inveso/Oppenheimer merger as a good example of that,” he said.
Talent always is on his mind, especially technical talent. One problem today is competing with the likes of Amazon, Apple and Google. That said, Pimco has opened a recruiting office in Austin where they can mine the computer science talent for the firm.
They also are keen on corporate diversity because “we want people who think differently.” He added that one study showed that how people make a decision is based on their history. “If you are 55, and lived through Volcker, you worry that inflation could go up ,” he said. “If you’re 26, you think rates will be 2% forever.”
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