Friday, June 20, 2014

Fwd: (BN) Pimco’s Gross Wagering on Low Market Volatility in ‘New Neutral"

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(BN) Pimco's Gross Wagering on Low Market Volatility in 'New Neu
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Pimco's Gross Wagering on Low Market Volatility in 'New Neutral'
2014-06-19 18:30:04.25 GMT


By Mary Childs
     June 19 (Bloomberg) -- Bill Gross said Pacific Investment
Management Co., manager of the world's biggest bond fund, has
been betting that volatility across asset classes will remain
very low, as gauges of price swings fall to their lowest levels
on record.
     "We sell insurance, basically, against price movements,"
Gross, chief investment officer of Pimco, said in an interview
today in Chicago at Morningstar Inc.'s Investment Conference.
"At Pimco, that's what we've tried in the last four or five
weeks."
     The wager on low volatility by the $2 trillion asset
manager is "part and parcel" of its outlook for the next three
to five years, an era it calls the "new neutral," Gross said.
The outlook is characterized by low interest rates and lower,
more stable global growth. Stocks and bonds will only return
about 5 percent and 3 percent respectively, as any changes in
Federal Reserve policy will be taken cautiously, the Newport
Beach, California-based firm said in a report in May.
     The firm's money managers "all know all parts of the new
neutral," and incorporate it into their trading, Gross, 70,
said. "Historically, Pimco has succeeded in selling volatility,
and yes, it's nice volatility's come down."
     Pimco's strategy has caused traders to speculate that the
company was selling calls and puts on the Standard & Poor's 500
Index in April and May in a bet that prices won't spike or drop,
and also amassed positions in interest-rate swaps to express the
same view, according to four people who heard about the trades,
all of whom asked not to be identified because they aren't
authorized to discuss them. Gross declined to discuss specific
trades at Pimco.

                         Low Volatility

     "People came into this year thinking we were on the verge
of a breakout in economic data, it hasn't happened and people
realize Fed policy isn't threatened anytime soon," said David
Schawel, a money manager at Square 1 Bank in Durham, North
Carolina. "That's a green light for low volatility to
prevail."
     The trades are probably "less about compelling value and
more about a belief that the path for credit risk is very low
for the foreseeable future," Schawel said. "The longer this
benign environment drags on, the more people are willing to
expect the status quo remains."

                            VIX Index

     The Chicago Board Options Exchange Volatility Index, which
measures price swings in stocks, closed yesterday at 10.61, the
lowest level since February 2007. This year's high of 21.44 on
Feb. 3 compares with a five-year average of 19.7.
     Call options are derivative contracts that allow investors
and traders to wager that the value of an underlying security
will increase, and puts bet on a decline. The contracts give
investors the right but not the obligation to buy or sell a
security at a certain price.
     The S&P surged to 1,956.98 yesterday, the highest ever,
from this year's low of 1,742 in February. At an investor
conference in May, Goldman Sachs Group Inc. President Gary Cohn
blamed the reduction in trading on calm markets and the Fed's
efforts to hold down interest rates.
     Pimco outlined its new thesis On May 13, established in its
annual Secular Forum, which guides its investment philosophy for
the next three to five years.
     At the Secular Forum, Pimco's money managers and analysts
listen for two and a half days to "distinguished guest
speakers," who this year included Harvard University professor
Carmen Reinhart and FiveThirtyEight.com founder Nate Silver, to
establish their worldview on global economies and markets. For
the rest of the week, they turn that philosophy into trading
strategies.

                           New Neutral

     In the aftermath of the 2008 financial crisis, Pimco's co-
founder Gross and his former co-Chief Investment Officer Mohamed
El-Erian popularized "the new normal" to describe an era of
subdued returns, heightened government intervention and
increasing clout for emerging nations in the global economy.
     Now, five years later, after El-Erian's abrupt resignation
in January, Gross refined that view. While the "new neutral"
maintains an expectation for subpar returns, it's a more stable
outlook compared with Pimco's previous forecast as the risks to
the markets are lower. Generating returns is becoming
increasingly difficult as central bank policies elevated prices
on so-called risk assets, the report said.
     Gross, who started the firm in 1971 with two other co-
founders and has built one of the best long-term records in the
industry, has struggled in the past year to stem record
redemptions as his $229 billion Pimco Total Return Fund fell
behind peers.

                         'Basically Stable'

     Total Return, which lost to 63 percent of rival funds over
the past year, has returned 0.03 percent over the past month,
beating 60 percent of competitors, according to data compiled by
Bloomberg.
     The fund will again top its competition this year, Gross
said in a Bloomberg Television interview last month, as it
sticks to the front end of the yield curve, buys bonds maturing
in five years to seven years, and focuses on high-yield debt and
risk assets, "which will be not high-returning but basically
stable and low-risk and low-volatility."

For Related News and Information:
Pimco's Paul McCulley Salutes Fed For U.S. Escape From Trap (2)
NSN N6EEZI6TTDSB <GO>
Pimco 'New Normal' Is Now 'New Neutral' After El-Erian Exit (2)
NSN N5ISD16S972J <GO>
Pimco Said to Wager $10 Billion in Default Swaps: Credit Markets
NSN MVYCY56JIJVW <GO>
Fund search: FSRC <GO>
Bloomberg fund performance: FPC <GO>

To contact the reporter on this story:
Mary Childs in New York at +1-212-617-6772 or
mchilds5@bloomberg.net
To contact the editors responsible for this story:
Christian Baumgaertel at +1-617-210-4624 or
cbaumgaertel@bloomberg.net
Sree Vidya Bhaktavatsalam, Josh Friedman

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