During the reign of “bond king” Bill Gross, PIMCO relied on the instincts and acumen of one man to make most investment decisions for the fund. Since his abrupt departure in 2014, life at PIMCO continues to evolve in ways and in directions that the imperious bond maestro would most likely have viewed as anathema and, consequently, never have implemented or approved.
Gross’ acrimonious and abrupt exit from the firm sent the fund manager into a temporary tailspin as it was forced to wean itself off the investment stratagems of one individual, who, for years, was revered on Wall Street as something of a fixed-income guru. Post-Gross, PIMCO still remains one of the world’s largest bond fund managers with $1.7 trillion in assets, down from the approximately $2 trillion it managed during the Gross era.
Later this year, Newport Beach-based PIMCO will open a new office in Austin, Texas, hiring 250 additional employees. The job descriptions of most of these new staff members is indicative of the new direction the firm is taking under the tutelage of investment chief Daniel Ivascyn and and CEO Emmanuel Roman.
The new hires are predominantly software and hardware engineers who have been tasked with upgrading the IT systems of the firm as well as designing databases and analytical tools that will assist managers in making more informed and timely investment decisions.
The firm hopes the use of artificial intelligence in conjunction with novel database design and integration will facilitate its interest rate forecasting abilities by providing current and historical information on key metrics that impact the yield curve, such as the anticipated rate of inflation, the latest Consumer Price Index and wage stagnation or growth.
Much has changed since Gross left PIMCO as the firm responds to the new market environment, enhanced competition from exchange-traded funds and the need to lower costs. Ivascyn and Roman expect that the application of the new technical capabilities will assist in anticipating the ebb and flow of bond prices.
Additionally, Ivascyn believes the new ventures will facilitate PIMCO's plans to lower its costs — a key factor in its ability to compete with ETFs. The goal is to help generate investment ideas through database channels that were not in place when Gross was at the helm, as he would have viewed them as superfluous.
The new initiatives demonstrate how much the culture, strategic decision-making and outlook of the firm has changed. The new investment chief has literally upended the reigning corporate ethos that had prevailed under the direction of its star manager. While the flamboyant Gross was known for his at-times volatile and irascible temperament, Ivanscyn is unpretentious and unassuming and prefers the consensus approach to investment decision-making.
In a recent interview, Roman contrasted the PIMCO of old under Gross and the new firm culture under Ivanscyn, whom he calls, “the perfect CIO for the Pimco we think of in the future.” Roman added that, “What we’ve lost, and I would say is a good thing, is the autocratic style."
PIMCO hopes its significant investments in database technology and artificial intelligence that it plans to incorporate into its core business model will help it compete and stay ahead of the growing roster of ETF bond funds. Active bond mutual funds still have mere total assets under management, but ETFs are in dogged pursuit.
The adaptation and implementation of artificial intelligence, or machine learning, in the investment decision process is not unique to PIMCO. In March 2017, BlackRock announced a plan to merge most of its actively managed funds with those that rely more on financial models and algorithms to pick stocks.
PIMCO’s changed strategy reflects the new investment climate, especially newfound market volatility, a period of an uncertain yield curve and an end to the inverse bond-equity relationship that enabled investors to have the best of both worlds: a continually rising stock market with sufficient bond yields to provide a cushion when the market periodically dropped. It is highly doubtful the returns realized by Gross in such an advantageous and stable interest rate environment could be replicated in the future.
Bond fund management firms are going to rely increasingly on enhanced database technology, software coding and artificial intelligence to not only help better respond to interest rate movements, but also to cull as much relevant information as possible so that it can be available, in a form that is helpful, to fund managers, enabling them to make more knowledgeable investment decisions.
