In the wake of a posting on the research puzzle about “bond math,” it’s worth checking back in on the Pimco bet against Treasuries (in a benchmark sense) that has caused such a stir since it came to light in March.
As you can see above, the flagship Pimco Total Return Fund (PTRRX) has lagged its benchmark index, the BarCap Aggregate (replicated by AGG), by a good amount since then. The reason is the strong rally in Treasuries, illustrated in the bottom panel by the substantial drop in yield to maturity for seven-year notes and thirty-year bonds. (The returns on representative ETFs are included in the top panel in like colors.)
There has been a fair bit of fingerpointing at Pimco because it has underperformed since its bold call, and some confusion about how much it has reversed course or the regret it (and its leader, Bill Gross) has. I don’t know if the call will prove to be a good one going forward, but I know that often some of the best long-term moves start out by looking dead wrong and that good managers take active risk against their benchmarks. The jury is still out on this one, although many pundits and armchair portfolio managers have already entered a verdict. (Chart: Bloomberg terminal.)
“The natural constraints of an investment style or strategy can be too easily ignored.” Often those constraints are hidden, but in analyzing an investment strategy or manager, you need to get at them. The next chapter in the series on “states and styles” refers to that bond math, but it’s really about the broader principle at play. (Check out the bond chart that’s included, though, for the cold hard facts.)
A few things I’ve seen of late that might interest you:
“Fund Structure Arbitrage,” by Quantivity.
Also regarding the behavior of individual and institutional investors in markets, a piece on socializing finance.
The Capco Journal offers a PDF full of articles about applied finance and the gap between theory and practice.
A great list of investment books from James Montier via The Big Picture.
Two items that focus on decision making: An excerpt on Farnam Street from The Paradox of Choice and a New York Times Magazine piece on decision fatigue.
Yesterday was my day at the Great Minnesota Get-Together. After my visit three years ago, on the eve of the financial crisis and the presidential election, I wrote (in “it’s fair time“) about the behavioral impulses and buying habits on display and how they relate to investment decision making.