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PIMCO's Roman: An Advocate for Active

Emmanuel Roman asserts his firm's fixed-income edge at the Morningstar Investment Conference.

This article is part of our coverage of the 2019 Morningstar Investment Conference.

The closing keynote of the second day of the Morningstar Investment Conference featured PIMCO CEO Emmanuel Roman. Morningstar senior analyst Eric Jacobson sat down with Roman to discuss the bond behemoth's role in today's fixed-income market.

Roman takes the stage five years after PIMCO founder Bill Gross made headlines at the 2014 Morningstar Investment Conference. In many ways, not much has changed at PIMCO since then, he said: The firm remains laser-focused on active fixed-income investing.

"At the end of the day, we believe markets are mostly efficient. It is hard to make money, so every single resource we have is used to try to add value, to cut the left tail," said Roman. And in a market like this one--"which by any definition is overextended"--every attention must be paid.

That's the basic business model: "If you perform, they will come," said Roman, apologizing for the baseball movie analogy.

"You need to decide what business you want to be in. You can be an index provider and try to be the cheapest. We are trying to be an alpha machine."

Asked about how he thinks PIMCO compares to industry peers today, Emmanuel said that what keeps him up at night is the competition that PIMCO may face in the future. "You don't benchmark yourself against your peers, though you may feel good about it. The real question is how we will compete with potential new entrants that we can't foresee today."

Jacobson noted the rising popularity of passive investing among fixed-income investors, and asked whether Roman is worried that inflows to passive funds could overtake those to actively managed funds.

Roman is not worried: "Passive for fixed-income investing makes absolutely no sense. In the index, more levered companies get a bigger slice." He cited PIMCO funds' long history of outperforming their benchmarks and asserted his belief that the firm can continue to deliver "net-of-fee, long-term alpha on a risk-adjusted basis."

Jacobson, who has sparred with PIMCO on fund fees in the past, asked Emmanuel to explain the firm's philosophy on pricing.

"It's about fairness," Roman said, firmly unapologetic. "At the end of the day, it's how you build a business. If we aren't competitive we won't survive. We have a fierce and independent board of directors who know what others are charging."

Roman noted that the cost of some aspects of doing business has increased dramatically, in ways that clients don't see. These are things like operations, cybersecurity, trading, and disaster recovery. "Do you want to be bulletproof? We care a lot about those things, and they are costly."

Technology is key to those efforts, as well as to portfolio construction and risk management. But today, as the conventional wisdom has it, the brains that used to go to Wall Street now go to Silicon Valley.

That trend is a good thing overall, concedes Roman. Everyone benefits when MIT grads create the next Google. But it does leave the financial sector competing for tech talent. So PIMCO recently set up an office in Austin in order to hire computer science graduates and give them the flexibility to build an interesting career. It already has 80 employees and expects to have 200 by the end of the year.

"We care a lot about macro at PIMCO, and we have a global board chaired by Ben Bernanke where we discuss what the Fed may do and try to predict possible outcomes. But we can also look at every single press release the Fed has ever released and use machine learning to see patterns. I don't know which is better, but we can do both."

That said, investing remains a "very human endeavor" in Roman's view, and corporate diversity is a key part of success. Asked why diversity is relevant to running an asset management firm, Roman gave a bottom-line answer: It will lead to better risk-adjusted performance.

"I had an epiphany when I met a marine biologist who said there are 10,000 types of salmon because that makes the ecosystem more stable. The argument for diversity is that you want people of different genders, races, and social backgrounds contributing to decisions."

Risk was top of mind for the audience, and at the close of the session, Roman was asked what bond investors should be aware of. He warned that "at the end of a business cycle, it is very easy to be lazy in the hunt for yield. Be diligent about not being in the riskiest parts of the market. Stress-test your risks and know that liquidity will be much worse than you think it will be in a bear market. I've learned that the hard way."

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