PIMCO has several funds and many segregated mandates that follow a similar, unconstrained type of strategy - the largest of which is the $220bn PIMCO Total Return fund.
As with any change of a high profile manager, there will be investors reviewing the fund and some are likely to decide to exit. The fact that the fund has not been performing up to PIMCO’s high expectations recently has already seen it lose assets of over $70bn in the last year, so the departure of Mr Gross could be the catalyst to provide another wave of selling.
Fast money has already been trying to get in front of this trade; they are expecting to see large redemptions and are trying to predict which bonds will be sold.
Why not sell those now and buy them back at a cheaper level afterwards? That is what some dealers and hedge fund managers are also looking at.
Other participants are concerned that this is the big liquidity testing event that markets have feared for some time now and this is why I spent considerable time yesterday reviewing the entire portfolio.
As you would expect, PIMCO is a very professional and transparent operation, and therefore line by line holdings data is easily available.
I have to confess to having been initially stunned by some of the single position sizes and found myself wondering how on earth they could liquidate such large positions within any reasonable timeframe.
In credit markets, where dealers are making prices on a 1 million by 1 million, or 2 million by 2 million basis, how could a portfolio manager justify holding several hundred million of certain positions?
However, as I looked further, the enormity of the portfolio became less of an issue – there were 6,200 line items and holdings in global government bonds are enormous. In fact, over 60 per cent of the portfolio is in highly liquid rates products, in which billions can be traded every day.
There would be no need to touch any of the credit holdings with so much liquidity available in their vast holdings of rates products.
On top of this, is an overlay of derivatives to express precise interest rate duration, as well as an additional overlay of credit in a more liquid form via the credit indices. Overall, I have to say that I was a lot less concerned than I thought I would be.
It did also become clear that running such size is an enormous constraint on the managers and their opportunity set is very different to the one that we at TwentyFour are looking at every day… but that’s another comment.
Back to liquidity, I would expect the regulator to be watching this situation very carefully, but more importantly, so are the portfolio managers.
In building a portfolio of nearly $300bn, they have had to take liquidity into account, and similarly when it shrinks (and it already has done by $70bn) they are also taking this into account.
Having said this, I don’t want to be too blasé about the situation either. There will be redemptions, therefore PIMCO will be sellers of securities, and in the context of fixed income markets, they will be large tickets.
Most of the redemptions will most likely be allocated to other managers over time, but in the short term it is the behaviour of nervous market participants that is likely to cause the most volatility… if we see it.
In the meantime, we will be watching the technicals in the market very closely to see how this actually transpires. This is a very important test case for the market.
Mark Holman is chief executive of TwentyFour Asset Management. The views expressed here are his own.
