PIMCO, One Of Most Storied Investment Firms, Shifting Focus From Humans To Algorithms

Speeding up delivery of insights from data to execution. JL

Justin Baer reports in the Wall Street Journal:

Net inflows into passively managed bond funds have outpaced their active counterparts for the past five years. Pimco plans to build out its capabilities in trading bonds and other securities electronically, in a bid to reduce execution costs. The firm plans to launch investment funds driven by trading algorithms. One focus: predicting inflation. The firm aims to add consumer data that will help make faster and more-accurate forecasts on the consumer-price index that informs investment decisions on most debt securities
Pacific Investment Management Co. used to rely heavily on one man to make many of its key investment decisions. Now it’s betting a big part of its future on millions of lines of software code.
Pimco will open a new office in Austin, Texas, later this year to help recruit more tech-savvy workers who might otherwise spurn the bond manager for traditional software companies, people familiar with the matter said. The Newport Beach, Calif.-based firm plans to grow its workforce by 10% this year, adding about 250 new staff.
Many of those new employees will be engineers tasked with modernizing Pimco’s technology systems, from the tools used to harness new databases of information to the platforms that trade bonds electronically. The changes aim to sharpen investment ideas and lower costs.

The new investments mark the next phase of a strategy set in motion three years ago, when cofounder Bill Gross’s bitter departure wrenched the firm from its overdependence on a single bond manager. Investment chief Daniel Ivascyn and former hedge-fund firm executive Emmanuel Roman have since stemmed the flow of client money from Pimco’s core bond funds, and now are looking to stay ahead of the relentless growth of exchange-traded funds and other low-cost passive investments.
Net inflows into passively managed bond funds have outpaced their active counterparts for the past five years, according to Morningstar Direct. Active bond mutual funds still hold an edge in total assets, but ETFs are gaining ground.
Pimco’s mutual funds had $33 billion in net inflows in 2017, reversing a four-year stretch of client withdrawals, Morningstar said. While Pimco remains one of the world’s biggest investors, with about $1.7 trillion in assets, the firm still manages less than the some $2 trillion it oversaw at the height of the Gross era.

Mr. Roman, Pimco’s chief executive, is placing his bets on computer-driven and private-debt investing, believing those areas offer promise without veering the firm outside its traditional focus on the debt markets.
“Our strategy remains the same: to be the premier fixed-income manager in the world,” Mr. Roman said earlier this month in an interview. “But to do this we need to invest.”
Mr. Roman’s plan isn’t without risk. While most of the firm’s core bond funds are performing well, a slump could lead to questions about whether Pimco should stick to its knitting, clients and consultants have said.
The firm plans to launch a slate of investment funds driven by trading algorithms, he said, but many other initiatives are designed to give Pimco’s traditional portfolio managers an edge in finding profitable trading ideas or lowering costs.
Mr. Roman said Pimco plans to expand its current portfolio-management analytics team. Led by Ravi Mattu, who joined the firm in 2011, the group currently employs about 65 people.
“We’re turning up the volume, so to speak,” Mr. Roman said.
Pimco plans to build out its capabilities in trading bonds and other securities electronically, in a bid to reduce execution costs. The firm is also on the lookout for new databases its managers can tap to help form investment ideas, and plans to add new analytical tools. Mr. Roman said he expects to form at least one partnership with an outside technology company.One area of focus: predicting inflation. The firm aims to add consumer data that will help managers make faster and more-accurate forecasts on the consumer-price index, a benchmark that informs investment decisions on most debt securities, Mr. Roman said.
Finally, Pimco is also exploring partnerships with research universities to study how asset managers can apply machine-learning techniques that have worked in other industries, including retailers, Mr. Roman said.
Mr. Roman unveiled plans to add another U.S. office in a Feb. 26 memorandum to staff. In that memo, previously reported by Bloomberg News, Mr. Roman listed three cities as contenders: Austin, Dallas and Denver.
Pimco negotiated with officials from the three cities before choosing Austin earlier this month. The Texas city is close to a number of institutional investors, including some Pimco clients, boasts a technology corridor and is home to the University of Texas. “That is a key factor as we look to build up the office to about 200 employees by the end of 2019,” Mr. Roman wrote in a memo sent Monday to employees.
Patrick Feigley, head of U.S. sales at Pimco’s wealth-management business, will run the new office, according to the memo.
Mr. Roman is also leading Pimco’s push into private credit, real estate and other so-called alternative investments, a direction many clients predicted he would take given his experience with hedge-fund firms.
Mr. Roman worked for  Goldman Sachs Group Inc . for 18 years before joining GLG Partners. He spearheaded GLG’s sale to  Man Group PLC , which he ran before joining Pimco.
Hundreds of billions of dollars in client money fled Pimco in the months following Mr. Gross’s exit, threatening to oust the firm from its spot as one of the world’s largest bond managers and denting morale. The firm’s assets under management dropped to about $1.5 trillion.
Improved investment returns, led by Mr. Ivascyn’s Pimco Income Fund, helped stem outflows and calm nerves among the firm’s portfolio managers.
“Things are much better,” said Mr. Roman, noting that employee pay was up in 2017.