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PIMCO's CEO on Fees and the Future

Eric Jacobson

Eric Jacobson: Hi, I'm Eric Jacobson. I'm an analyst with Morningstar, and we're here at the Morningstar Investment Conference. As our guest today, I've got Manny Roman, the CEO of PIMCO. Manny, thank you so much for joining us.

Manny Roman: Thank you, Eric, for having me. It's great to be here today.

Jacobson: We've had a lot of conversations about a lot of things before, but one that came up a couple times today, even from a member of the audience, was about fees and PIMCO and so forth. As we've said, we've sparred a little bit before on fees, but I want to give you an opportunity to talk a little bit about what you view as your philosophy on fees and how you choose to set them and structure them.

Roman: So what we try to do is we try to be fair to investors, and we have a business model where all that matters in the end is the net return. And so, we have a process where we think of expected return on our product, expected alpha, why we think we can generate the alpha, and then we have the landscape of our competitors, and then we price it accordingly, thinking also of our customer base and what will we need over the years to come to sustain the alpha.

But fairness is very important and also, we have a process where the independent directors at the end of the day make the decision, and we've been doing this for a very long time. It's a process which is 40 years old, and so hopefully it leads to the right result. And then sometimes, we readjust slightly pricing up and down, mostly down as you know.

Jacobson: I'm sure we'll have more opportunities to argue about it at some point.

Roman: Sure, sure we will.

Jacobson: One of the other things I just wanted to ask you was that ... relating a little bit to cost, we also had a conversation recently about the advancement of passives in the marketplace and how that is finding its way into fixed income, to what degree, and so forth. And I'm curious to know what you think in terms of the viability of that, the likelihood that passives are going to be as big a problem, if you will, for active fixed-income shops as they are for active equity.

Roman: We don't think it's going to be the same. We think that we have a very sound and reasonable argument why the good active fixed-income managers significantly outperform its benchmark over the short, medium, and long-term horizon. We at PIMCO have outperformed any passive instrument by 1%-1.5% over one, three, five, and 10 years.

Now, the interesting part of this is the reason. And the reason is because one, the indexes are poorly constructed with too much turnover and companies which have high balance sheets to be overweight in the index. Two, because you have noneconomic agents who end up owning things like the ECB or the Fed that other economic agents may not own. Three is what I call the biodiversity of fixed income, the fact that GE has 400 different bonds at different currencies that you can swap and bring back into dollars.

And four, the fact that we have the ability to use derivatives to go from cash to derivative and essentially add extra alpha through value strategies that we've been doing for a very long time at PIMCO. Yes, we're big believers in active management, and the proof is in the pudding; so we look at our numbers, and we say net of fees we need to substantially outperform the benchmark. That's what clients pay us to do.

Jacobson: Another theme, big theme: technology. One of the angles that you've talked about is improving trade execution and what-have-you. The counter to the passive part of that question is, how far do you really think you can go in terms of improvements? Because, in effect, part of the proposition of value for being an active fixed-income manager is you take advantage of inefficiencies, as you said, and when you're looking to ... obviously, part of that is looking to do that with technology, but should we be thinking that at some point technology's going to make fixed income a lot closer to equities, anyway?

Roman: You and I may be replaced by a computer. I think that one of the things that often people don't really think about is that the amount of alpha has to be also divided between managers, and so, I also think ... and Dan Ivascyn, who's our CIO, and I constantly think about what do we get, and whether we're getting our fair share of alpha versus other people.

And so, I think the energy and investment in people and thinking about how to make money is also a way to outsize the share of the alpha that we get from the pie, and some of the things that worked very well in the past are working less well. And that's fine. There are other things now, which work also very well, and I think you need to be also at the margin be able to reinvent yourself and try to find other ways to make money, which may not exist or may not have worked in the past.

PIMCO is a great macro shop, the macro environment hasn't been great over the past three, four, or five years to make significant bets. I'm sure we'll be great again and we're preparing ourselves for an easier macro environment if and when it comes.

Jacobson: Well, thank you very much.

Roman: It's my pleasure, Eric.

Jacobson: We appreciate you being with us.

Roman: Thank you very much.

Jacobson: For Morningstar, I'm Eric Jacobson. Thank you for being with us.