Category Archives: Pimco

DoubleLine Joins State Street On Active Bond ETF

ETF giant State Street Global Advisors teamed up with DoubleLine Capital, the firm of famed bond investor Jeffrey Gundlach, to launch SPDR DoubleLine Total Return Tactical ETF (TOTL) last week.

The actively managed ETF is DoubleLine’s first foray into the ETF space.

One of the most respected bond fund managers in the market, Gundlach ran $12 billion TCW Total Return Bond Fund until 2009. At the time, Morningstar said it was in the top 1% of all funds invested in intermediate-term bonds for the five years ended in 2009.

Gundlach left TCW after a management dust-up and formed DoubleLine in 2010. He’s DoubleLine’s CEO and chief investment officer.

“It’s not a clone of any existing strategies,” said Jeffrey Sherman, a DoubleLine portfolio manager, during a webcast this week. Sherman will co-manage the ETF with Gundlach and firm President Philip Barach. “It’s a new product created just for this offering, but it draws upon the views of Jeff Gundlach and the DoubleLine team.”

While not identical to the firm’s flagship DoubleLine Total Return Bond Fund , ETF investors will be getting a deal. The ETF charges an expense ratio of just 0.55%, compared with the fund’s 0.72% fee for retail investors.

By going with a name-brand fund manager, State Street (NYSE:STT) is making a calculated effort to take advantage of the problems at Pimco. It looks like it wants to become the leading bond ETF in the country by taking on $2 billion Pimco Total Return Bond ETF (BOND).

BOND has seen more than $1 billion in outflow since Bill Gross, Pimco’s bond maven, left the firm in September. This caused BOND to fall to second-largest active bond ETF.

TOTL’s investment objective contains elements of both DoubleLine’s total return and core fixed-income strategies. The ETF aims to have a low interest-rate risk profile.

At the same time it expects to maximize returns through active allocation and selection of securities its analysis determines to be mispriced in the market.

DoubleLine Total Return Bond Fund has focused on mortgage-backed securities. But the ETF can hold any bond, including U.S. Treasuries, investment grade corporate credit, high-yield bonds, collateralized loan obligations, asset-based securities, bank loans and sovereign debt from both developed and emerging markets.

The portfolio must contain a minimum of 20% in mortgages, but it isn’t required to hold anything else. While high-yield, emerging market and CLO securities can each only take up as much as 25% of the portfolio, as much as 85% can be held in government bonds.

The duration of a single bond can range from one to eight years and no security can have a bond rating below BBB-.

State Street Getting Active

State Street, which has a reputation for running passively managed funds, has slowly moved into the active ETF arena. The new fund is its third active bond ETF and 10th overall.

While active equity funds have a hard time beating their benchmarks, the less transparent bond market creates more opportunities for managers to beat their index.

“Passive does best in U.S. equities, but in investment grade fixed-income 65% of managers outperform their benchmark,” said Dave Mazza, head of research at SPDR ETFs. “A skilled fixed-income portfolio manager can find inefficiencies across the market because it is illiquid and opaque.”

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Exec’s Departure Latest In Pimco’s Bad Year

Paul McCulley’s announcement last week that he would be stepping down as chief economist at Pacific Investment Management Co. was just the latest note in the giant bond fund company’s annus horribilis.

Early last year, Chief Executive Mohamed El-Erian, Pimco’s heir apparent, left over disagreements with Bill Gross, Pimco’s founder and portfolio manager of the firm’s flagship Total Return Fund . At the time, Total Return was the largest bond mutual fund in the world and Gross the most famous bond investor on the planet.

Then in September, after the fund shrank by $65 billion over the previous 16 months, Gross also abruptly quit, shocking the mutual fund world and sending Pimco into turmoil. He’s now at Janus.

McCulley, a close friend of Gross, had left Pimco in 2010, but returned in May to help Gross calm investors’ nerves amid the outflow.

“McCulley had been brought in by Gross when things were unraveling in the management ranks,” said Jeff Tjornehoj, head of Lipper Americas Research. “Bringing Paul in was like bringing the band back together. He came back so Bill could show ‘It’s not as bad as the newspapers say.'”

With Gross’s departure, there wasn’t much reason for McCulley to stay, and management made that clear with the recent hiring of Joachim Fels, Morgan Stanley’s chief economist, as the new global economic adviser.

New Pimco Team

In the wake of Gross’s departure, Daniel Ivascyn, who has been at Pimco since 1998 and is head of the mortgage credit portfolio team, was named group chief investment officer. In 2013, Morningstar named him Fixed-Income Fund Manager of the year.

Pimco also named deputy chief investment officers Mark Kiesel, Scott Mather and Mihir Worah as portfolio managers of Total Return Fund.

Kiesel, named Morningstar’s Fixed-Income Fund Manager of 2012, is the global head of corporate bond portfolio management with oversight for the firm’s credit research. Mather was previously head of global portfolio management, and before that led portfolio management in Europe.

Before running the real return and multi-asset portfolio management teams, Worah was a postdoctoral research associate at the University of California, Berkeley, and the Stanford Linear Accelerator Center.

In the four months since Gross left, Pimco said, the fund delivered a net after-fee return of 3.99%, outperforming its benchmark by 1.11 percentage points.

Will Inflow Follow?

“The strong performance of the Total Return Fund since Scott Mather, Mark Kiesel and Mihir Worah took over management of the fund is a reflection of the talent of our seasoned portfolio management team,” said Douglas Hodge, Pimco’s CEO, in a statement January.

Still, it doesn’t look like the new team is instilling much confidence in investors. January was the 21st consecutive month of withdrawals, with net outflow of $12.5 billion, although this was significantly lower than the $32.3 billion pulled out the month after Gross left, according to Morningstar. Over the past 21 months, Total Return Fund lost $159.3 billion in net assets, down 54% from its 2013 peak of $293 billion, according to Morningstar. It is now the world’s second-largest bond fund.

For the full story go to Investor’s Business Daily.

Pimco Total Return Wins Top Capital Link Award

The best and brightest in ETF Land were honored in New York recently.

The Pimco Total Return ETF (BOND) captured the top prize at Capital Link’s annual ETF conference in New York recently. BOND won the award for Most Innovative Exchange-Traded Fund in 2012. The award was presented at the 12th annual Capital Link Closed-End Funds and Global ETFs Forum at the Metropolitan Club last month.

The awards are based on nominations by a committee of analysts and industry specialists who actively follow the products. Capital Link isn’t part of the nominating committee nor can members of the committee be candidates for the awards. Capital Link also gave out awards to the closed-end fund industry, but that doesn’t interest me.

iShares cleaned up by winning the rest of the slate. iShares and Blackrock, its parent company, won Best Shareholder Relations by an Exchange-Traded Product (ETP) Sponsor. This is award to the sponsor who practices the best financial disclosure and is proactive in shareholder communications. iShares/Blackrock also won Best Investor Relations Website in 2012.

The award for Most Innovative Index/Index-based ETF in 2012 went to iShares Morningstar Multi Asset Income Index Fund (IYLD)

Ed McRedmond, senior vice president of institutional and portfolio strategies at Invesco PowerShares, was awarded for “Contribution to the Exchange-Traded Fund Sector” for the third time. He also won in 2008 and 2009. This is given to the individual whose work contributed most to the ETF sector in the given year. McRedmond was also recognized a week earlier at the 9th Annual Global ETF Awards with an “ETP Icon of the Industry Award” for the second time. The ETP Icons of the Industry Awards recognizes individuals who have helped promote the development of the ETP marketplace.

“Investor education has always been our hallmark at Invesco PowerShares, ” said McRedmond in a written statement. “We strive to build relationships using multiple touch points to educate investors about the many beneficial ways ETFs can be used as portfolio tools. It’s truly an honor to be recognized with these awards by the many wonderful and talented people we work with each day to further the development of the ETP industry, and reflects the cumulative efforts of all my Invesco PowerShares colleagues.”

McRedmond, who joined Invesco PowerShares in 2005, works to increase the awareness and usage of ETFs by working with analysts, due-diligence groups and portfolio managers.

The analysis team at Morgan Stanley Smith Barney won the Best Research Analyst/Team for Exchange Traded Products in 2012 for the second year in a row. The team consists of Michael Jabara, David Perlman, and Stephen Minar.

Stocks Appear to Ignore Good News From Libya

At Friday’s close of 10817.65, the Dow Jones Industrial Average is down 16% from its high of 12928.45 on May 2. My friend, Lewy Katorz, an angel investor, predicts a 30% drop, which means we are going down to about 9050. That seems about right to me.

Libyan rebels moved into Tripoli on Sunday and captured two of Col. Moammar Gadhafi’s sons. Even though this should push the price of oil lower, stock futures Sunday night were still in the red.

CNBC’s Rick Santelli uses some extremely wacky logic to determine the bond rally will end on Monday. But, I’ll stick with the Wall Street Journal’s in depth report of the obvious, bond ETFs rally when stocks sink.

WSJ offers a nice chart showing the performance of the long-term bond ETFs. Ironically, the fund with the biggest advance this year through Aug. 4, the Pimco 25+ Year Zero Coupon U.S. Treasury (ZROZ), up 18.8%, actually saw net outflows of $16 million.

Might Still Be Too Early to Buy Europe ETF

And then there were three. The European debt crisis took a step backward Monday after Portugal received an $11 billion bailout from finace ministers of the European union. This is the third bailout over the past year by the European Union in the infamous PIGS country appellation. With Portugal, Ireland and Greece having succumbed to poor fiscal policies, the only PIG remaining is Spain, and its future remains in doubt.

With Portugal taken care of, Greece returns to the top spot among Europe’s biggest worries. Pimco’s bond king Bill Gross, who runs the world’s largest bond fund, says Greece is the world’s No. 1 candidate for default.

And that problem has gotten even worse with the weekend arrest of Dominique Strauss-Kahn, the head of the International Monetary Fund.

Last week, I spoke with Dimitre Genov, the senior portfolio manager of the Artio Global Equity mutual Fund, about his view on Europe, Japan and the global economy.

Genov says while Germany, France and the Netherlands are strong, most of the continent is still weak and it’s obvious that Europe’s financial problems have not been solved. The European Central Bank is buying time as it tries to take more proactive measures to fight the debt crisis. Genov says that Greece still can’t compete and that it’s wages are too high. He says it’s inevitable that that Greece will need to restructure its debt. He expects this to lead to more downside in European stocks.

However, Genov doesn’t think Spain will go into default. “It’s more a liquidity problem,” say Genov. “They are making moves to liberalize the labor market. They need to get rid of the wage rigidity to become more competitive and more efficient.”

Many of the European governments need to deal with debt, he says, but they’re finding it very difficult because none of the politicians are willing to make hard choices. “The market has to force them to do it,” says Genov. And while he says there are definite bargain stocks to be found in Europe, many will end up being value traps as the entire continent faces years of deleveraging. Meanwhile, he thinks Japan is facing structural decline as well, and sees a lot of deleveraging.

Overall, he recommends investing in emerging markets despite their poor performance lately. “We still like China,” says Genov. “ The economy may be slowing down but 7% to 8% a year is still significant growth.” He says the multiples in Chinese assets have compressed. He suggest consumer stocks as food prices have rolled over and inflation should peak in the next quarter or two.

Still, he says the market is entering a seasonally weak period and metrics have started softening, so it’s quite possible the current pullback in the stock market could post a significant decline. “The U.S. won’t enter a recession this year, but expect a slowdown before more upside.”

Vanguard’s MSCI Europe ETF (VGK) holds stocks from Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The expense ratio is just 0.14%.

Cautious Forecast for Next 6 Months

Pardon the obvious, Wall Street is a pretty bullish place. So, it’s refreshing to hear someone down there actually say things don’t look so good.

Ed Keon is one of the few.

“There remains a high level of caution and pessimism in the country among the average consumer and business executive,” said Keon, managing director and portfolio manager for Quantitative Management Associates. He spoke Tuesday at Prudential’s 2010 Midyear Market Outlook panel, the one with the tantalizing title: “Will the economy double-dip?” He added, “There’s plenty of money to invest, but people are reluctant to do so.”

He says the stock pullback is a symbol of not just the economic activity, but also a malaise among the American people. But he believes stocks represent a good value, compared to the long-term bond. The dividend yield for the S&P 500 Index is 2%. Considering that a quarter of the index doesn’t pay dividends, many of the stocks in the index are paying 3% to 6%, compared to the 10-year bond’s yield of 2.9%. When you can get a better return from risky large-cap stocks than Treasury’s you know stocks are cheap. Remember, prices move inversely to yield. So as prices move lower, yields rise.

For a full explanation of the relationship of yields to prices and dividends, check out Dividends Stocks for Dummies.

Not only are stocks cheap, but earnings are strong and will come in above expectations, said Keon. Still he cautions again the expectation that stocks will see a sudden resurgence of confidence. Until we address the structural problems in the economy, Keon said we won’t be able to get moving until we deal with the giant levels of debt. He says he’s currently holding allocations near benchmark weights, but is underweight TIPS bonds.

Top ETFs holding TIPS in alphabetical order:

  • Barclays Capital TIPS Bond Fund (TIPS)
  • PIMCO 1-5 Year U.S. TIPS Index Fund (STPZ)
  • SPDR Barclays Capital TIPS ETF (IPE)
  • SPDR DB International Government Inflation-Protected Bond ETF (WIP)