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Fund Times: PIMCO's Gross Joins Forces with Greenspan

Plus, news on manager change at Royce, GMO sees asset bubbles, and more.

Morningstar Analysts, 05/21/2007

PIMCO's famed fixed-income manager Bill Gross will be getting a bit of help from former Federal Reserve Chairman Alan Greenspan. PIMCO just announced that it has retained Greenspan as a special consultant. He'll participate in the firm's quarterly cyclical Economic Forums, as well as its annual Secular Forum.

Far from being an academic exercise, these meetings help Gross and the entire investment management staff at PIMCO set interest-rate, sector, credit-quality, and country and currency positioning across their lineup of bond funds, including PIMCO Total Return PTTDX, the nation's largest bond offering. Greenspan's knowledge of the internal workings of the Federal Reserve, its personalities, and its policies, could be quite valuable. Greenspan's acumen with broader matters in the global economy can also be a boost to the firm.

PIMCO's Current Economic Outlook
In his summary of this year's Secular Forum, which took place over three days in May, PIMCO's Gross explained that the firm would be taking advantage of global growth via "still unexploited local currency fixed-income markets." This suggests we can expect continued, or expanded, use of fixed-income instruments denominated in foreign currencies in PIMCO portfolios whose mandate allows for it. And while some focus solely on the short-term performance of a fund, and it has recently been noted that Total Return has lagged peers over the past year, we're glad to see this firm continue to think hard about longer-term trends and how to invest in relation to them.

Royce Closes One Fund and Sheds Management at Another
Royce & Associates announced the closure of Royce Opportunity RYPNX to new investors, as of May 18. We're glad to see this small-value option close, as its asset base has increased markedly in recent years (to near $2.7 billion), which can hamper a fund's ability to make nimble moves, especially in small- and micro-cap stocks.

Royce also announced a management change at Royce Technology Value RYTVX, which had been subadvised by Jonathan Cohen, of JHC Capital Management. Now Royce's own Whitney George will comanage with Dana Serman, who comes to Royce from JHC Capital Management. We're optimistic about the team. Serman has been doing much of the stock-picking for the fund as Cohen has gradually become more interested in other ventures; we believe that George will lead the fund to concentrate more on higher-quality names that have very solid balance sheets.

Cohen first earned fame as a Merrill Lynch sell side analyst when in 1998 he set Amazon.com's AMZN target price well below its then market value, and after tech-sector cheerleader Henry Blodget, then of CIBC Oppenheimer, had set a much higher price. Merrill Lynch then jettisoned Cohen, replacing him with Blodget, who eventually left the firm in disgrace.

All the World's a Bubble
Jeremy Grantham, chairman and cofounder of Grantham, Mayo, Van Otterloo & Co. (GMO), recently argued in his April quarterly letter that the world is facing its first truly global bubble. With strong fundamental economic conditions globally, and a tremendous amount of liquidity chasing returns, we're seeing asset prices of all kinds inflate to unsustainable levels, he argues.

In fact, Grantham writes: "Never before have all emerging countries outperformed the U.S. in GDP growth over a 12-month period until now, and this when the U.S. has been doing well.... All three major asset classes--real estate, stocks, and bonds--measure expensive compared with their histories.... [And] the risk premium has reached a historic low everywhere."

According to GMO research, Grantham contends, so much money is pursuing risk so cavalierly, that we could soon see a situation that turns the traditionally conceived investment relationship between risk and reward on its head, resulting in: "a world where investors are paying for the privilege of taking risk." Of course, he also reminds us that all bubbles must eventually come to an end. In the end, whether one agrees with Grantham's analysis or not, it does underscore the importance of carefully considering asset price valuation.

ING Fund Gets New Manager
ING Investments has announced that Daniel Eustaquio has replaced Rob Drijkoningen as manager at ING Emerging Markets Fixed Income IMIAX. Eustaquio joined ING Investment Management in October 1998.

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