VettaFi sat down with Jerome Schneider, PIMCO’s Head of Short-Term Strategies, at Exchange. Schneider discussed the potential benefits of active management and PIMCO’s priorities in the space.
VettaFi: To start, do you mind giving our readers an overview of PIMCO’s ETF business and your priorities in the ETF space?
Schneider: That’s a great place to start. PIMCO started back in 1973 with the thought process: Here’s fixed income – how do we bring it to investors? And, more importantly, how do we think about the process of revolutionizing how fixed income is managed? We now call that active management, but at the time it was very novel.
Fast forward, we saw how accessibility to investment platforms had evolved. One of those keystones over the 90s and and early 2000s was the ETF platforms, predominantly in the equity landscape. We were thinking to ourselves: Why can’t it be more fixed income oriented, and why can’t it be more actively managed fixed income orientation?
That’s when we came to the market with MINT, in 2009. Since that point in time, PIMCO has been fixated on how to deliver continual active management to our clients via the ETF wrapper primarily, and, at the same time, continue to evolve to the landscape, to the markets.
Since that point in time, you obviously were coming out of the financial crisis, you have had a variety of monetary policy eras, global economics, geopolitical stresses, banking crises. Those are all factors that come into play, and what we’ve realized is that there’re very deliberate ways that investors want to access expertise.
VettaFi: For advisors who are looking at the quickly growing lineup of active fixed income ETFs on market, what should they be considering?
Schneider: It can be confusing, and I think that’s why we are trying to lift the veil of being opaque. We’re trying to lift the veil of using big words that might be confusing, especially when you’re talking about economic outlooks. These are things that seem very daunting.
We’re trying to explain that having a view about how you allocate starts at the beginning. What’s your goal? Is your goal capital preservation? Is your goal income generation? These are very tangible things to an investor.
With that in mind, we can say, here’s the best way to do that, given where we are in the economic cycle. From that point of view, we’re developing products.
The short end has capital preservation products like BILZ or MINT. We have yield-oriented products like PYLD or BOND. We have high yield and loans ETFs as well, if you’re looking for that type of exposure.
Those are slightly granular approaches that look to be nuanced, finding opportunities within the broader opportunity set. The key here is to have flexibility within architecture – meaning, you want flexibility in terms of how you create diversified portfolios. You want to have flexibility to adjust to the changing landscape of the economic outlook. That’s really what all of PIMCO’s ETFs have in common with each other: We’re able to adapt – given a cycle, given multiple cycles – to where we see those opportunities for our clients.
VettaFi: In the current environment, where do you see the greatest opportunity for active management?
Schneider: For the first time in a generation, fixed income is finally having its time in the sun.
We’ve clearly come from an era of negative rates, zero rates, so now we have positive yields in general. What’s interesting about this environment is for a long period of time, as rates rose, people were enamored with sort of keeping it safe, owning treasury bills. What we’re finding now is that people are looking to maintain resilience in that income component.
Maintaining resilience isn’t as easy as you think – you can do it a couple ways. You can buy longer-dated bonds that have a lot of maturity risk or a lot of interest rate risk, and that isn’t necessarily the only way to do it. What we’re showing is that owning not just treasuries but agency mortgages, corporate bonds, maybe some select asset-backed security opportunities, these are higher in quality assets that allow you to be diversified. Diversification allows you to be more income oriented.
Bond Opportunities
Let’s take it back a notch, though. When you think about the opportunities, for years investors really focused on one thing in markets: Capital appreciation. If you owned a stock, you wanted that stock to go from $100 to $120, and you said ‘that was a success, because I made $20 on that’.
But bonds didn’t necessarily work that way as quickly. Bond yields have gone lower basically since the mid 80s all the way to a few years ago, and that downdraft of yields created price appreciation. Bonds appreciated in value, prices went up, yields went down.
That’s no longer the case, but we’re finding the income component to the investment calculus is just as important to investors now as capital appreciation. When investors think about it, they’re perfectly fine having some small amount of appreciation, whether it’s in bond portfolios or equities. But what’s important is that equity expectation of return, the risk-adjusted expected return for equities, has come down quite a bit – because yields are higher. To compensate for that, the income component is that much more attractive, and that’s where investors are becoming more balanced in their approach.
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