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PIMCO Makes Changes to BOND

Posted by Mike McLaughlin on Mar 13, 2017, in Thoughts , tagged with , , , ,

Last week PIMCO announced changes (PDF) to its flagship Total Return active ETF, BOND. The gist: different investment focus to meet changing investor needs, new management team, same ticker.

I had a quick comment in the Ignites story (subscription required) on the change in which another observer stated that the appropriate move for PIMCO in this case is to launch another product, not tweak BOND. I find the move interesting enough that I thought to cover a few more things. So, three points each on two topics:

What’s Important About the Context Surrounding the Change?

  1. BOND is roughly $2 billion in assets. Not to minimize those assets, but they’re small relative to the whole of the Total Return strategy (75B+ in the mutual fund alone) and the firm’s $1.5 trillion in AUM.
  2. In general, active ETFs have not taken off as some have hoped. It’s difficult to project that PIMCO’s changes to BOND put a significant short or mid-term influx of assets at risk.
  3. Positioning the move as being grounded in the changing needs of investors is (a) appealing given the nature of today’s bond market, and (b) credible given that PIMCO is altering a product that has performed well, not poorly.

So Why Might This be Worth Doing?

  1. The Total Return strategy has been on the defensive since the fallout from Bill Gross’s departure. At least for the ETF this move enables PIMCO to focus on client needs and the new (and strong) team as part of a more positive conversation.
  2. Transitioning an existing product avoids adding another active ETF into an already-crowded ETF market and one that (again) has not been overly conducive to active funds.
  3. The scale of the assets involved makes this a potentially-appealing learning exercise from a strategic standpoint. PIMCO can mine the implications of pivoting existing ETF offerings, recasting the messaging for Total Return, and the like. (I realize this is far-fetched but the move has me thinking about adopting the regular reinvention strategy of Chicago’s famous Next restaurant for an ETF.)

There are so many nuances to consider. Even the fact that the ticker symbol is unchanged has implications. After all, if people know only one thing about active ETFs, fixed income ETFs, and PIMCO ETFs, the BOND ticker is probably it. Will the ticker being the same undermine efforts to communicate the changes?

It will be interesting and fun to see how this ultimately plays out.

A Quick Look Into FinTech

Posted by Anu Heda on Mar 13, 2017, in Thoughts , tagged with

Last week I visited the offices of a New York FinTech leader. FinTech is attracting copious news mentions and billions of investment dollars (see chart below). We’ve helped a handful of asset managers understand and plan for the emergence of robo-advisors (a subset of FinTech), so gaining a fresh perspective was very exciting to me. As I walked around the offices and spoke with people in different business functions, three thoughts came to mind:

  1. This company understands the long game is just starting. They talk in traditional consumer financial services terms like cost of acquisition and lifetime customer value to predict future profitability with psychographic, life-stage, and attitudinal data. It is a different mindset than intermediary-oriented asset managers. When speaking of financial advisors, I often hear some sort of bracketing of financial advisors (i.e., dabbler, bronze, silver, gold) based on past sales production.
  2. The competition is Google, Facebook, and Amazon. The team sees those companies as the primary competition because they all possess massive, active, and trusting customer bases. Seeing these technology companies as the competition reinforces the emphasis on cost of acquisition as a company like Amazon could immediately begin marketing an end-user FinTech service to a global customer base (similar to marketing Prime to the 260MM+ customers worldwide) and have a cost of acquisition many times lower than a new entrant.
  3. People spoke to me about asset managers as key partners and not competitors. Not one person I spoke with mentioned a desire to start buying/selling individual securities in a commingled vehicle. So FinTech (robo-advisors in particular) becomes a new distribution channel for asset managers. And with any new (and successful) distribution channel, the incumbent channels will lose share.

This was a highly interesting afternoon. I started to mentally sketch a few conclusions lightly. For now, I’ll keep them to myself but would love to hear your thoughts. Send us a quick e-mail with ideas or better yet, a place and time to discuss over beverages.

 FinTech

Best Blogs of the Week #263

Posted by Anu Heda on Mar 13, 2017, in Best Blogs of the Week , tagged with , ,

Three robust posts from the last two weeks. The quality of charts in asset manager blog posts is dramatically improving as seen in all three posts. I want include the Van Eck and WisdomTree posts not only for the salient point each makes, also to show how product marketing is infiltrating some blogs. It’s an interesting trend occurring at a few of the firms we follow.

AB – Evaluating the Trump Effect on Global Equities – focusing a lens on potential policy outcomes is an increasingly important component for isolating select investment candidates that could deliver solid returns in highly unpredictable times.

Van Eck – Follow the Flows: Active versus Passive –  For the three year period ending January 31, 2017, passively managed funds have attracted over $1.4 trillion of new assets according to Morningstar. In that same period, actively managed funds have experienced net outflows of $475 billion.

WisdomTree – An Asset Allocation Study for a Moderate Portfolio – or those willing to alter asset allocations, we believe a continuous improvement in returns per unit of risk could be realized.

robust chart

Best Blogs of the Week #262

Posted by Anu Heda on Feb 27, 2017, in Best Blogs of the Week , tagged with ,

Only two posts this week (focused on inflation) and one question.

Franklin Templeton – K2 Advisors : Why We Like Activist Hedge Strategies – It could be said that activist managers in some ways represent the only strategy that generates alpha to some degree. While not always successful, activist funds seek to unlock “hidden” value in the companies they invest in.

William Blair – The Impact of Inflation – In other words, bonds were behaving more like equities. Now that inflation is becoming more apparent, I believe that repricing in the bond market has only just begun.

inflation

 

Question – do you think this chart proves that ETFs do not cause volatility? It seems to mash two things: ETFs are popular and volatility is low to make a point about causes of volatility. What do you think?

Data Presentation

Can We Make Data More Digestible?

Posted by Mike McLaughlin on Feb 20, 2017, in Thoughts , tagged with , , ,

25 home runs. 100 runs batted in. A .293 batting average.

Those data points, in part, summarize the 2016 baseball season of Jose Abreu, the best offensive player on my favorite team, the Chicago White Sox. Baseball has undergone a huge statistical revolution over the last 20 years. I chose three very traditional data points for Abreu, but the fact is there are literally hundreds of individual stats tracked for players these days.

All of that data is well and good, but digesting it can lead to a very simple question: just how good was Jose Abreu in 2016? It turns out there’s a clear answer to that question, because one thing baseball has done very well is simplify complex data.

For example, there’s a statistic called Weighted Runs Created Plus, or wRC+. It summarizes a player’s entire offensive value in a single number. Without diving into the technical details, two things make wRC+ very effective:

  1. It adjusts for context. Specifically it adjusts results based on (a) league-wide averages, and (b) the stadium the player plays in (since some are more or less friendly for offense than others).
  2. It summarizes everything in a SINGLE number. A wRC+ value of 100 represents league average. Every point above or below that represents a result that is 1% better or worse than average. So, Abreu’s wRC+ of 118 means he was 18% better than the average offensive player last season.

That’s a lot of baseball… what’s the point? Simply put, I think baseball’s ability to present data in a digestible manner has potential for asset management. Consider expenses as an example. A common presentation is to present expense ratios directly, as Dimensional Fund Advisors does here:

DFA Expense Ratio

But how much does that really help? Sure knowledgeable investors and advisors have a good notion of what is high or low when it comes to fees, but not in any systematic or (frequently) very precise way.

Providing category or peer data alongside that, as Morningstar and some managers do, certainly helps. But even there an investor or advisor is left to mentally digest the scale of the difference.

So what if data like expense ratios was represented via a more comprehensive statistic that combines product-specific and category-average data into a single number scaled against 100, much like wRC+? Let’s call it the “Expense Index.” For the DFA fund noted above, the Expense Index would be 38, immediately communicating that the fund’s expense ratio is 62% lower than its peer group.

I can envision many applications for this type of normalized data. Of course there are questions. For example, without an external / regulatory requirement would firms want to be so direct, especially with data like fees? I mean, many would want to avoid showing an Expense Index of 150.

So there is some thinking to be done on what information is most conducive to such an approach. Even so, simplifying and providing context around data strikes me as an opportunity worth of more exploration.