The Kremlinology Of PIMCO

 

(August 2012) There are two sides of PIMCO. There is the extremely open and transparent PIMCO which can be seen in public expressing economic and market  views. This public face of PIMCO is exemplified by the frequent appearances of Bill Gross on CNBC and guest editorials of Mohamed El-Erian in the Financial Times. Then, there is the PIMCO which the rest of the financial media is exposed. This is the PIMCO that rarely responds to detailed questions or when it responds declares anything it provides “off the record”. While PIMCO is not afraid of the media, it is very disciplined about its message and distribution. If you’re not the NYT, FT, CNBC or Bloomberg, your chances of getting an interview or even an answer to a question that you can re-print is remote.

 

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I compare to following PIMCO to Kremlinology.

What is Kremlinogy:

Kremlinology is the study and analysis of Soviet (and today, Russian) politics and policies based on efforts to understand the inner workings of an opaque central government.  - Wikipedia

PIMCOlogy is the study and analysis of PIMCO’s often opaque internal politics and market views based on publicly available data.

PIMCO releases lots of information.  It has monthly reports on its bond mutual funds, it must report the holdings of its Bond ETFs on daily basis, and its key decision makers are often on television. However, quantity is not necessarily quality, or to be precise, actionable. Bill Gross recently published a controversial article titled “Cult Figures” in which he argued that equity returns over the next couple decades would be much lower than they have been over the last 100 years. While interesting, I don’t think anyone has a clear idea how to act on this point of view. The open and transparent PIMCO likes to explore big ideas. The opaque PIMCO likes to hide its investment strategies.

To understand PIMCO’s investment strategies, you need to sift through the information they make public. Recently, I thought I had uncovered that PIMCO was making a bet on the Canadian dollar. The PIMCO Enhanced Short Maturity Fund (MINT) had 13% of its assets in Canadian Debt.  When I first saw this, my initial thought was,  “Did other PIMCO funds have a large portion of their funds invested in Canadian issuers?  After a few minutes of research, the answer came back that the fund was unusual in its exposure to Canada, which lead to another question:

 

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Why would PIMCO want to own specifically short maturity Canadian debt?

I have to admit like most Americans, I know very little about the Economy and politics of our northern neighbor. However, I was able to find an article about Canadian interest rates. The central bank of Canada, aptly named the Bank Of Canada, was considering raising interest rates. Its economy was doing well, so well that the central bank was worried about inflation. PIMCO’s move suddenly made sense:

  1. Rising Interest rates would hurt the value of long term bonds.
  2. However, a country that with rising interest rates when the rest of the world was keeping rates low would benefit from a flow of funds increasing the value of its currency.

Holding short-term Canadian debt would allow PIMCO to benefit from the rising value of its currency while limiting interest rate risk.

 

Was PIMCO making a currency bet?

NO.

I wanted to double-check my story. The prospectus of the Enhanced Short Maturity Fund (MINT) indicates that the fund cannot hold bonds denominated in non-US dollars. So, it was buying debt from Canadian firms denominated in dollars. In short, the fund thinks that Canadian firms are not being given full credit for Canada’s economy and offer good yield relative to their low risk.

Stay tuned for what other interesting PIMCO tidbits may be discovered in the next issue of PIMCOlogy.

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