Back from managing the Harvard Endowment, Mohamed El-Erian is to be the new CEO of bond giant Pimco.
Stepping out: Bill Thompson, to retire at the end of the year. All announced in a press release from Pimco yesterday.
El-Erian has a pretty good record. He cut his teeth at Pimco with a number of clever bets in LatAm (for example, tripling Pimco’s Brazilian bond holdings in 2002, predicting that the country would avoid default inspite of the soaring yield). Until early 2006, he was in charge of the Pimco EM Bond Fund, from where he moved to manage the Harvard Endowment.
If El-Erian is coming in on a high, Thompson, remarkably in the current market, is leaving on one. As the WSJ notes, Pimco is the only firm among the 25 largest fund groups that has posted a positive percentage increase in stock and bond assets this year.
The key factor behind that success? Buying agency-backed mortgage bonds. Here’s an interview with Pimco’s ABS MD back in January. Extracts below:
Agency MBS are yielding more relative to Treasuries, swaps and Agency debt than they have in over 20 years. These are extremely high quality securities that are collateralised by single family homes, and carry guarantees by government sponsored enterprises (GSEs) or the full faith and credit of the U.S. government in the case of GNMA. Although there has been a run of bad news coming from Fannie and Freddie relating to credit losses and capital positions, PIMCO is not concerned about their ability to provide guarantees for MBS.This presents a historic opportunity to invest in Agency MBS relative to Treasuries.
But, Pimco didn’t get it all right:
PIMCO expects credit tiering will be the main theme of the 2008 mortgage market. We think the market will begin to differentiate much more carefully in mortgage credit markets. In other words, high quality assets should outperform low quality assets. Agency MBS are likely to shake off the general mortgage malaise that followed the collapse in the subprime market and the global credit crunch.
In addition, global central banks, some of the largest holders of cash Treasuries and Agency debt have so far been slow to move into Agency MBS to take advantage of the potential higher returns. We expect them to be more active in the coming months.
