Pimco’s Ivascyn Beats Gross’s Flagship: Riskless Return
By Christopher Condon and Alexis Leondis - Aug 29, 2012 12:00 AM ET
Bill Gross is the biggest and best-known bond picker at Pacific Investment Management Co. He isn’t the top performer.
Daniel Ivascyn, who runs the $11.2 billion Pimco Income Fund, holds that distinction for the past five years among 26 Pimco bond funds bigger than $1 billion, according to the BLOOMBERG RISKLESS RETURN RANKING. The Income Fund rose 13.8 percent in the period after adjusting for price swings, compared with the 9.6 percent gain by Gross’s flagship Total Return Fund, which ranked fourth, according to data compiled by Bloomberg.
Ivascyn, 42, has tempered volatility in the fund by investing in higher-quality mortgage-backed securities, including in the case of those not backed by government agencies. He also picks corporate bonds that are senior in thecapital structure, whose holders get priority over other debt sold by the issuer in the event of a default. His strategy of loading up on debt he deems less risky is in line with Pimco’s“new normal” view that predicts extreme outcomes because of global market swings.
Caveat AppliesIvascyn applies caution while comparing his risk-adjusted returns to those posted by his more famous boss. Matching his returns against Gross’s $270 billion Total Return Fund (PTTRX) isn’t an“apples to apples comparison,” because the two funds have different objectives, he said. The Income Fund’s primary objective is to provide investors with a consistent dividend stream. Gross’s fund aims to give investors a higher total return, which is a combination of income and appreciation, he said.
“In a world of so much volatility, staying senior in the capital structure has significantly insulated the fund,”Ivascyn said in a telephone interview from Newport Beach,California, where Pimco is based. “It allows for a significant margin of error if the world deteriorates.”
The fund’s 14 percent position in non-agency mortgage securities, which aren’t backed by agencies such as Freddie Mac (FMCC)and Fannie Mae, contributed to performance as Ivascyn focused on those that had “resilient” cash flow, yet were trading at a discount to their value, he said. Ivascyn also focused on the senior-most tranches of securitized assets that bundle mortgages to avoid losses in the event of defaults on the underlying securities, he said.
Return RundownBloomberg’s risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
Ivascyn produced the best risk-adjusted return among Pimco bond funds with at least a five-year track record over the past one and three years as well. Gross’s $2.1 billion StocksPLUS TR Short Strategy Fund (PSTIX), which allows investors to bet against the Standard & Poor’s 500 Index through futures and total-return swaps, was the worst of the group, with a risk-adjusted return of 0.2 percent over the past five years.
Mortgage SecuritiesNot including the impact of price swings, Ivascyn’s Income Fund had a cumulative return of 67 percent over the past five years, which ranked fifth among the 26 Pimco funds, and volatility of 4.9, which ranked third. Gross’s Total Return Fund had a cumulative return of 55 percent over the past five years, which ranked 11th among the 26 Pimco funds, and volatility of 5.6, which ranked eighth, according to data compiled by Bloomberg.
About 40 percent of Ivascyn’s fund was in mortgage-backed securities as of July 31, compared with 51 percent for Gross’s Total Return, according to the firm’s website. Sovereign bonds from non-U.S. developed countries are the second-largest holding after mortgages for the Income Fund, while in Total Return, it’s U.S. government and related debt.
Before joining Pimco in 1998, Ivascyn worked at Bear Stearns Cos. in the asset-backed securities group. He has a bachelor’s degree in economics from Occidental College in Los Angeles and an MBA in analytic finance from the University of Chicago Booth School of Business.
Fidelity, OppenheimerIvascyn’s fund also had the highest risk-adjusted return among 64 similarly managed rivals that included non-Pimco funds with least $1 billion in assets over the past five years. Among those funds, Pimco Income Fund beat the $9.9 billion Fidelity Strategic Income Fund (FSICX) over the past one and five years. It ranked second over three years behind the $6.2 billionOppenheimer Senior Floating Rate Fund (OOSAX), which focuses primarily on collateralized senior loans.
Ivascyn has run the Income Fund since its inception in March 2007. He was part of the team that helped the firm weather the U.S. housing meltdown by guiding it largely out of so-called non-agency MBS, or those without an explicit or implicit guarantee from the U.S. government, before the crisis. The firm, including the Income Fund (PONAX), then went back into non-agency MBS beginning in 2009 when prices fell.
More than half of the allocation to mortgage-backed securities is in agency debt and the rest is in mortgages not backed by the government. Ivascyn said he likes agency mortgages because of their high quality, implicit or explicit U.S. government guarantees and liquidity. In the non-agency part of his portfolio, he focused on higher-quality securities that traded below their value.
MBS OutperformsOver a longer period, mortgage-backed securities have proved a good value and carried relatively low volatility. Barclays’ index of U.S. mortgage-backed securities returned 36 percent in the past five years, ahead of government bonds while trailing corporate credits. They had the lowest volatility of the group, and the highest volatility-adjusted returns.
Ivascyn followed a similar pattern of buying at discounts with bank loans in the middle of last year, after the European sovereign-debt crisis scared away retail investors and prices fell to about 90 cents on the dollar, he said. Bank loans have returned 7.7 percent this year through Aug. 27, according to the S&P/LSTA U.S. Leveraged Loan 100 Index.
“We try to be as tactical as possible,” Ivascyn said.“In this deleveraging environment with lots of volatility, typically these big swings in risk-on versus risk-off lead to a lot of technical repricing, and that provides opportunity.”
Market VolatilityIvascyn said the market volatility has presented investment opportunities. Government bonds from developed markets outside the U.S. account for 19 percent of the fund’s assets; emerging-market government-backed bonds represent 16 percent; U.S. investment-grade corporate bonds are 7 percent; and U.S. junk bonds, or those rated below investment grade, 5 percent.
“We’re more diversified than at any other point,” he said. “But we still think housing-related investments will continue to perform.”
Gross had what he termed “a stinker” in 2011 after eliminating U.S. Treasuries early in the year and missing a rally as investors rushed to the safety of government-backed debt. The Total Return Fund returned 4.2 percent last year, trailing 70 percent of peers, according to data compiled by Bloomberg, his worst year since at least 1995.
Gross ReboundsThis year, it’s outperformed 97 percent of similarly managed funds and 98 percent of peers over the past five years, according to data compiled by Bloomberg data.
Total Return Fund decreased its allocation to 33 percent from 35 percent in U.S. government and related debt as of July 31, compared with a month earlier, according to the firm’s website.
Pimco has gathered more new customer money this year than any U.S. mutual-fund manager except Vanguard Group Inc., according to data compiled by Morningstar. Investors deposited $28.3 billion with the firm’s mutual funds through July, with 28 percent of that going to the Total Return Fund. Ivascyn’s Income Fund gathered $3.8 billion during the same period.
To contact the reporters on this story: Christopher Condon in Boston at firstname.lastname@example.org; Alexis Leondis in New York at email@example.com