Dan Ivascyn may not love the limelight, but he’s going to have to get used to it.
As his Pimco Income fund hits its 10-year anniversary, it has become both the firm’s, and indeed the world's largest active bond fund by assets driven by stellar performance over both the long and short term.
As the firm’s chief investment officer, a position he has held since 2014, he is far from an unknown name, but has kept a much a lower profile compared with the louder luminaries of bond investing, such as his predecessor Bill Gross or DoubleLine Capital’s Jeffrey Gundlach.
While time on the trading floor versus in the TV studio is clearly a personal preference, it is also driven by a fear of missing out on investments.
‘There is nothing wrong with getting out there like Jeff and Bill do,’ he says. ‘At the end of the day, as active investment managers, our job is difficult and any time we spend away from the trading floor, interacting with the team and focusing on implementation of ideas, could be missed opportunities.’
He hasn’t missed too many of late.
The Income fund, which he co-manages with Citywire AA-rated Alfred Murata, has been on a tear over the past 12 months to the end of February, up 11% versus its benchmark’s 3.5%. Longer term, it is no slouch either. Over both three and five years, the fund is ranked number one in its Citywire sector, Bond Multi-Sector Income.
Over 2016 as investors turned to bonds in the face of uncertainty from first China, then Brexit and the US presidential election, no actively managed fund experienced greater net inflows than the Income strategy.
Total assets grew to $79.1 billion as of the end of March, up from $53.1 billion in January last year, surpassing stable mate Total Return, which is at $73.6 billion, down from a peak of $293 billion in April 2013.
EBBS AND FLOWS
This could be regarded as a significant moment, deemed to reflect the decline in popularity of the firm’s one-time flagship fund following the departure of former manager Gross in September 2014 and the rise of his heir Ivascyn.
But he does not see it like that.
‘In and of itself it means nothing to us and I personally don’t love the term flagship,’ Ivascyn says.
‘I’ve been at Pimco almost two decades and in the industry a little longer than that. Strategies will be in vogue from time to time. You’ll see demand shift as client needs evolve. You will see some funds get bigger and some get smaller. The one thing I am confident about is, if you provide good risk-adjusted returns over time and a strong product to investors, you will see positive flows.’
He is also keen to highlight the recent uptick in performance of the Total Return fund, which is managed by his desk buddy Scott Mather, alongside Mark Kiesel and Mihir Worah, who joined the firm within weeks of him back in 1998.
‘They navigated the challenging past few years very well,’ he says. ‘There were periods where we could have done better, but that’s always the case. I am very excited about their performance, particularly their recent performance since the election and during this period of rising rates.’
The Total Return fund is up 2.3% in the three months after the election to the end of February, compared with the Bloomberg Barclays US Aggregate Bond index, which has returned 1%, and the average fund in the Core Plus Bond sector, which is up 1.7%.
Despite all the changes at Pimco in his nearly 20 years with the group, there have been some constants for Ivascyn, such as his relationship with Mather.
‘He and I sat next to each other back when we were new at the firm,’ he says. ‘He went off to run money across all of Europe, and ironically we sit next to each other today and we have the same type of informal discussions we had back in the late 1990s.
‘That is not something I would have predicted. This is a pretty tight knit group. We have pretty heated discussions in the investment committee, like the Pimco of old but with mutual respect. It’s a close-knit group, which buys into the Pimco culture that Bill Gross and others created many years ago.’
Since Citywire spoke to Ivascyn, Pimco and Gross settled their long-running legal battle, following the latter's acrimonious departure from the firm, over alleged unpaid bonuses. In his suit, Gross had claimed he was the victim of a coup from fellow portfolio managers, including Ivascyn, who wanted a larger slice of the bonus pot.
The two sides reached an 'amicable' agreement outside of court, with Pimco undertoood to have paid Gross $81 million, which will go to his charitable foundation, the Bill and Sue Gross Family Foundation.
Pimco also moved to recognize the contribution of Gross and other founders to its success.
The company is dedicating a new 'Founders Room' in their honor at its Newport Beach headquarters. Additionally the Pimco Foundation, which oversees charitable donations and projects, named Gross a director emeritus and is establishing an annual Bill Gross Award.
Given the thawing of relations between the two sides, it is perhaps unsurprising to hear Ivascyn be complimentary about Gross during our interview and praise his legacy at the firm.
‘Bill Gross left us with what I think is a solid, time-tested, investment decision-making structure,’ he says, adding that the current leadership team had all been there a long time and that although there has been a spate of new hires over the past two years, ‘a lot has stayed the same as well.’
Regardless of Pimco politics or other strategies, the Income fund is certainly proving his theory that strong returns equal positive flows.
Ivascyn, a Massachusetts native who joined Pimco in 1998 after spells at Bear Sterns, T. Rowe Price and Fidelity, is a big Boston sports fan and likens his strategy running the Income fund to those used on the ice, football field or basketball court. Success, he says, is about having a strong defense during tough times and switching to offense when opportunities arise.
To this end, the fund is a mixture of high-quality defensive assets such as Treasuries, Tips, Australian bonds as well as agency and non-agency mortgage-backed securities (MBS), and riskier offensive assets in emerging markets, high yield and corporate credit.
As with all Pimco funds, macroeconomic forecasting plays a huge part in setting strategy alongside shrewd bottom-up security selection.
Examples of offense include buying non-agency MBS in the aftermath of the financial crisis and more recently, in 2016, adding high yield as oil prices fell, European bonds following Brexit and emerging markets after Donald Trump’s election win.
The position in high yield has since been reduced over the past several months as Pimco takes a more cautious approach to corporate risk.
‘We think the actual risk of recession is pretty low,’ Ivascyn says. ‘That said, corporate credit spreads have been pretty low recently and when we look at valuations we think investors should begin to become more cautious.
‘We are not alarmist but we do think prudent diversification into some of the other sectors will lead to a more resilient portfolio.’
Emerging markets, specifically Mexico, Brazil and some legacy positions in Russian government bonds and quasi sovereigns such as Gazprom, remain in play as the fund diversifies away from US credit.
‘We have gradually, over the course of the past several months, looked to some of the higher-quality emerging markets to diversify the portfolio,’ Ivascyn says.
‘With the US election outcome, there is increased uncertainty over emerging markets, in particular areas such as Mexico, which bears the brunt of the uncertainty. But we felt there was some overshooting.’
He adds that the vast majority of the fund’s emerging exposure is hedged back to the US dollar.
A QUIETER AFFAIR
In the run-up to the election, Ivascyn also cut back on the fund’s Treasuries holdings, on the assumption rates would rise in the aftermath. He then took advantage of falling prices following Trump’s victory to load up on longer-term debt.
Prior to the election, the fund’s duration was at one of the lowest levels it had ever been, 2.5 years, at the start of the third quarter of 2016. Following rate increases after the election, in the fourth quarter of last year, duration was added back into the portfolio, although it is still relatively low at 3.4 years. Selling off high yield also contributed to duration rising.
Although 2016 presented opportunities for offense, 2017 is, by comparison, a quieter affair. This means defense is the order of the day.
‘When we do get into these periods when complacency seems to dominate, we need to be patient,’ Ivascyn says. ‘I don’t know exactly how long we will need to wait and be patient but in the meantime there is a lot of localized dislocation within markets.
‘We are looking to hit lot of singles, as opposed to going for extra base hits, and we are pretty confident we will have opportunities to take advantage of more overshooting and volatility in the months ahead. But there are no guarantees.
‘[We will] sit back, be patient and more defensive, certainly than we were a year ago.’
Still, over his 10 years on the Income fund, Ivascyn has seen enough excitement from markets not to mind a potentially quieter stretch.
‘It has certainly been a memorable period over the past 10 years,’ he says. ‘People try to make it seem simple, but active management is always a challenging business. The market environment has been very difficult and will continue to be very difficult. It requires a lot of work. That has to be the mindset in order to generate strong risk-adjusted returns for investors.
‘At the end of the day, clients rely on active asset managers to add value during difficult market environments.’