Pimco founder Bill Gross' decision to jump ship has "profound implications" for fixed income investors, argues Principal Global Investors.
Speaking to InvestorDaily, Principal Global Investors senior product specialist for fixed income Mark Cernicky said Mr Gross' decision to leave Pimco represents a "watershed" moment that has been building for many years.
"The old way of investing in fixed income no longer works for investors and a new era of income-oriented investing is at hand," Mr Cernicky said.
The comments come after Pimco chief executive Douglas Hodge claimed the investment process at Pimco is "fundamentally unchanged".
But Mr Cernicky said fixed income investors and consultants will now need to rethink the investment logic of the last decade.
"Pimco has seen a significant amount of assets leave their flagship Total Return Bond fund over the last year. So, where have investors turned? The answer: passive strategies," he said.
"Perhaps in the interim passive investing is a viable option, but the technical features of fixed-income markets will make this approach a difficult long-term solution," Mr Cernicky said.
Investors should remain within actively-managed bond portfolios but seek active managers capable of navigating "idiosyncratic risks" (ie, credit picking) within the context of the macroeconomic environment, he said.
"The days of daredevil rate calls, while okay in a hedge fund, may not necessarily be a good thing in a core bond fund," Mr Cernicky said.
"It was good to be a risk taker over the past 30 years when the rewards came from the one-way decline in interest rates over those 30 years," he said.
Investors are set for a headache as the US Federal Reserve ends its quantitative easing program, which will result in a period of higher rates – and likely more volatility, Mr Cernicky said.
"Concentrated risks of these macro strategies are fine as long as you make the right call. But it has proven to be very difficult to get that rate call correct, as Mr Gross has recently demonstrated," he said.
"Instead, it’s much easier to get company calls or issue selection correct, as another influential investor, Warren Buffet, has proven time and again," Mr Cernicky said.
"The upshot is that investors need multiple sources of alpha from fixed income, such as issue selection, and not concentrated macroeconomic bets," he said.
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