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Goldman Sachs Group Inc/The
PIMCO EqS Pathfinder Fund
PIMCO EqS Emerging Markets Fund
PIMCO Total Return Fund
Neel Kashkari is no stranger to tough jobs. Three years ago the then-35-year-old Treasury Dept. staffer was appointed to oversee the Troubled Asset Relief Program, the government’s $700 billion bailout of Wall Street. For the former Goldman Sachs (GS) banker, that meant spending 18-hour days dissecting financial statements, holding marathon conference calls with executives, corporate attorneys, and central bankers, and being subjected to televised dressings-down by lawmakers on Capitol Hill. Although People magazine named Kashkari one of its sexiest men alive in 2008, Washington took its toll: After leaving his Treasury post in 2009, burned out and 20 pounds heavier, he holed up in a cabin in Northern California for several months to “detoxify,” he says.
Now, Kashkari is up for another daunting task. Last month the Newport Beach (Calif.)-based asset management company Pimco, which Kashkari joined two years ago, named him to run its fledgling equities division. The assignment comes as investors are growing disenchanted with money managers who pick stocks, withdrawing a net $351 billion from U.S. equity mutual funds since the end of 2007, including $66 billion so far this year.
So why is Pimco, which has devoted itself to bonds since Bill Gross founded the company in 1971, suddenly keen on stocks? For one thing, the easy money has already been made in fixed income. “Interest rates can’t go lower,” says Kashkari, sipping a Coke Zero on a visit to Pimco’s Manhattan offices high above Times Square. “There can’t be another 30-year bull market in bonds.” And while there are thousands of equity funds, he says Pimco can offer a superior product: “You’re not going to see us launch some plain, old U.S. large-cap fund or just tell people to go buy the S&P 500.” Kashkari says what sets Pimco’s equity offerings apart is a combination of well-researched global stockpicking with methods that curtail volatility.
The key, he says, is that Pimco can use its expertise in currencies and macroeconomics to find efficient methods of limiting losses. For example, he says his managers have been accumulating shares of Russia’s Sberbank and Hong Kong-based insurer AIA Group along with certain Western currencies that Pimco has found move in the opposite direction of the stocks. Using currencies to offset equity declines, Kashkari says, can be effective when many markets are declining in lockstep. “Pimco does not manage anything in a traditional buy-and-hold way,” says Geoffrey Bobroff, an asset management consultant in East Greenwich, R.I. “They like using derivative tools in all of their products.”
Pimco opened its first actively managed stock fund, Pimco EqS Pathfinder (PTHWX), in April 2010. Managers Anne Gudefin and Charles Lahr buy shares in multinational companies that they view as deeply undervalued. The fund has lost 2.6 percent in the 12 months through Oct. 17, compared with an average loss of 3.3 percent for the funds in its peer group, according to data compiled by Bloomberg. This spring, Pimco launched EqS Emerging Markets (PEQWX) and Emerging Multi-Asset. The company now runs about $4.5 billion in the three funds. Overall, Pimco has $1.3 trillion under management.
Kashkari says the company will launch new funds when it sees promising investment opportunities. Meanwhile, he has lured experienced equity managers from Franklin Templeton Investments, Capital Group, and Goldman Sachs Asset Management. “I spend a lot of my time recruiting,” says Kashkari, who adds that plenty of people want to work at Pimco. “I get cold-called by the bluest of blue-chip managers” who complain that their employers are more focused on marketing than investing, he says.
Making a name for itself in stocks has taken on a new urgency for Pimco. Its flagship bond fund, Total Return (PTTRX), with $242 billion in assets, is having one of its worst years on record, underperforming 82 percent of its peers in 2011. The main culprit: manager Bill Gross’s failed bet that Treasury bond prices would decline. “This year is a stinker,” Gross wrote in an October letter to clients titled “Mea Culpa.” The fund has taken in $183.5 million in new money this year, compared with an average of $32 billion a year from 2008 through 2010.
All the more reason to commit resources to the equity side of the business. “Pimco needs to diversify,” says asset management consultant Bobroff. “But I am not sure until they have a proven record of at least three years or a market cycle that investors or advisers will move equity money to them.”
The bottom line: As Pimco puts more emphasis on stocks, its flagship bond fund, Total Return, is trailing 82 percent of its peers this year.