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Pimco CIO Says Firm Is "Reducing Risk Across The Board"

Mark Kiesel probably isn't the first name that springs to mind when Pimco's investment strategies are being discussed.  That honor, ironically, still resides with Bill Gross even though he departed the firm for Janus over 3 years ago. 

That said, as the manager of the $10.4 billion Pimco Investment Grade Corporate Bond Fund and the firm's CIO of global credit, you should probably at least take notice when Kiesel says that he expects returns on financial assets to "be much lower for the next 3-5 years" and that, as a result, he's "reducing risk across the board"...which is exactly the message he delivered on Bloomberg earlier this morning.

"We actually think over the next three to five years the returns on financial assets are going to be much lower."

 

"We're concerned about monetary policy eventually reversing."

 

"Number two, the fiscal expectations are too high in the U.S."

 

"And number three, we're worried about geopolitical tension."

 

"In general, we have been reducing risk across the board."

http://www.bloomberg.com/api/embed/iframe

 

So where is Kiesel hiding Pimco's $10 billion of capital under his management?  Apparently, it's flowing into South America and 10-year U.S. Treasuries.  Per Bloomberg:

On the margin, Kiesel seized the opportunity to obtain deeply discounted bonds of Argentina, Brazil and Mexico with Latin America still in a slump.

 

Most presciently, he bucked far-fetched U.S. growth forecasts loosed by market exuberance about President Donald Trump. While many investors were tailoring strategies to an expectation of 3 percent annual growth in inflation-adjusted gross domestic product, Kiesel locked in steady long-term returns by purchasing relatively inexpensive futures contracts on 10-year Treasuries amid signs that GDP won't expand much beyond 2 percent. As a result, his fund's government-securities holding outperformed the benchmark by 56 basis points, which alone accounted for 46 percent of the fund's performance advantage over the benchmark.

 

The Treasury bond rally this year "is a function of declining views of inflation and growth, combined with lots of money chasing yield," said Joel Levington, the global director of fixed income for Bloomberg Intelligence. Despite the Fed's decision to raise short-term interest rates by a quarter point in March and again in June, bonds with maturities of 10 years or greater are outperforming debt securities of shorter duration, according to data compiled by Bloomberg.

 

Kiesel's holdings in financial-company bonds performed especially well, beating that benchmark sector by 77 basis points and accounting for 63 percent of his entire portfolio outperforming the market.

 

Of course, he also admitted to owning Illinois debt, so maybe take everything above with a grain of salt.