Fri, 5 Oct 2012
PIMCO's Vineer Bhansali says investors should consider active ETFs over traditional indexed vehicles because the latter are carrying very low yields and few prospects for price gains.
Shannon Zimmerman: For Morningstar, I am Shannon Zimmerman. I'm here today with Vineer Bhansali of PIMCO. Vineer is a managing director and portfolio manager at PIMCO, and also oversees PIMCO's quantitative strategies. Thanks very much for joining us, Vineer.
Vineer Bhansali: My pleasure.
Zimmerman: Vineer, you gave your talk at Morningstar's ETF Conference, and it's a very interesting title, a pun or a play on Dr. Strangelove: "How We Learn to Stop Worrying and Love the Active ETF." Is that the name?
Bhansali: That's correct.
Zimmerman: Just to set us up for this segment. Can you talk a little bit about what you talked about at the conference? How did PIMCO come to embrace the active ETF?
Bhansali: I think the pun, the movie analogy really was brought to me just a few days ago by Scott Burns. Scott mentioned why he used the title, and suddenly I realized that I had watched the movie 20 years ago. So, I watched it again on the plane yesterday and [saw what] a lot of the logical elements of how we actually went from being a nonparticipant in the ETF market to launching BOND and then what came after BOND happened to be.
I think the main thrust is that we took baby steps first to make sure that our operational processes were in place and that our reluctance regarding the portfolio disclosure and showing how we do things was not going to impede our other strategies and other funds. And [we really wanted to make] sure that if you're going to do this, we could add value for investors.
So, at the end of the day, I think the one thing that investors should take home is that PIMCO is vehicle-agnostic in terms of how we offer our products, and the ETF is a natural place for numerous investors who desire transparency. But at the end of the day, you are getting the same investment process, the same skill set that you get with our mutual funds. The reason you might want to do that with an active ETF like BOND is that the indexed ETFs have been forced because of the forces of financial depression to holding securities with very, very low yield. And there's really very little prospect for price gains.
So here you can add value for investors very simply by buying securities that prevent you from getting into that mob mentality of buying overly priced, high-priced securities.
Zimmerman: Sure. Industrywide, certainly in terms of asset growth, it's all on the ETF side. Although it's a young industry relative to the mutual fund industry, what are you finding at PIMCO in terms of fund flows into the mutual fund version of PIMCO Total Return and the ETF version? How's this working out?
Bhansali: Well, Bill Gross runs both Total Return fund and the ETF. Both funds have done extremely well, both in terms of performance. I think they're over 500 basis points in alpha over their benchmarks, and they have both seen substantial growth in terms of assets under management. I think the ETF, obviously, has had a smaller and shorter starting point, so in terms of proportionate increase it's been much larger. It's gone from zero close to $3 billion in a matter of few months. The Total Return fund is close to $270 billion, and we constantly see inflows coming in.
So I don't think launching another vehicle has been detrimental to any of our funds whether it's Total Return or any of our other mutual funds.
Zimmerman: Let's talk about one of the hiccups, I guess, that can come with an active ETF and the reason a lot of shops have resisted rolling out an active ETF, and you mentioned it, is portfolio disclosure which has to happen every day whereas with mutual funds its quarterly with up to a 60-day lag. How did you get comfortable with that giving away your portfolio holdings every single day?
Bhansali: So it was a long process, and that's part of the reason why we took baby steps from nothing to passive ETFs or indexed ETFs to soft active like HYS to MINT, which is a money market vehicle that doesn't have much duration but has fully disclosed money market securities to now. We spend a lot of time internally talking about whether or not this would cause us to lose potential alpha in our funds.
Every single specialty portfolio manager was involved in a discussion with myself, Tammie Arnold, and other people at the firm to see what potential impact there could be. Bill Gross was actually supportive right from the very beginning, and he believed that portfolio disclosure was not necessarily such an impediment. And he believed that to certain degree we have an illusion of secrecy. It's not real because we are so large; a lot of things that we do the world has seen already. In cases where we believe that doing something might actually beat our participation or performance for our funds, for example, illiquid securities , we will certainly keep those off the table for now.
For the mutual fund and for something like BOND, we did thorough analysis and found that disclosure was not really an impediment. And we've been doing it for about six months now, and from what I can tell there hasn't really been any substantial effect. Finally, the most important point is really the trade-off. Even if these concerns exist at the end of the day, if a broader set of investors can benefit from having this vehicle available to them, we should provide it to them.
Zimmerman: One other concern in addition to disclosure, another concern that’s often raised in connection with active ETFs, is erratic flows relative to mutual funds which isn't always the case, but are stickier typically, because you can't trade mutual funds throughout the day in a way that you can ETFs. What has PIMCO found in terms of that?
Bhansali: With BOND it's been one way. We haven't seen any real redeems; we've only seen inflows from day one. And that has to do partly with the way the portfolio is run with Bill, the performance, et cetera. We do agree and we do admit the possibility that some funds can go out and they do go out of the money market fund, for example, out of MINT.
But you have to remember that the ETFs for us are still a very small portion or a fraction of our total mutual fund complex. Our mutual fund complex is over $1.5 trillion, and the ETFs are only close to about $10 billion. The portfolio managers who are managing the ETFs are in most cases the same portfolio managers who are also involved with the mutual funds, so they are used to large flows and for them the funds that flow in and out are like all the other accounts they are managing. They can manage them. They've been doing it for a while, and it's really not a substantial impact.