As everyone knows, Mohamed A. El-Erian, Bill Gross and the rest of the PIMCO organization were touting the “New Normal” thesis from 2009-2011, when the US stock market was near its lowest point. Key points from PIMCO’s New Normal thesis were as follows:
- US economy is in a major national and global realignment. US economy had structural flaws which were exacerbated by the 2008 financial crisis.
- Muted economic growth worldwide, growth shifting to emerging markets
- Public sector increases its role as a goods provider
- Unemployment would be higher and more structural
- More expansive regulation, higher taxation and government intervention would sap the growth potential of developed economies
- Investors should reduce exposures to equities and expect lower investment returns
- Investors should favor the front-end of yield curves in many countries, income-generating investments and international investments instead of US investments.
We would have liked it if El-Erian, Gross, PIMCO et al had used their towering influence to actually suggest proactive ideas and solutions to enable the US to avoid the weak economic recovery from 2009 to present. We concede that El-Erian said that there “was the hope that policy makers would recognize that there are structural responses they needed to embark on.” Our analysis of El-Erian’s thesis was that with the exception of the stock market rally aided by the Federal Reserve monetary printing, he basically predicted what would happen under a Democrat President and a Filibuster-Proof Democrat Majority in Congress. We also like to point out that El-Erian is also a contributor to the far-left political website The Huffington Post and his advocacy for Keynesian stimulus policies have by and large been adopted by the Democrats from 2009-2011. The weak economies of the US and Europe from 2009 to present were due to unforced error and could have been avoided if policy makers hadn’t been implementing the Keynesian stimulus programs that El-Erian and Company were advocating.
There are also two things we wish to point out the PIMCO New Normal thesis:
- According to a study by the RIA Gross Domestic Product, Inc, a hypothetical portfolio invested according to the New Normal Model on May 1st, 2009 (when the New Normal thesis was released) would have underperformed the S&P 500 by 20.58% cumulative from May 2009 to April 2012.
- The two mutual funds that El-Erian co-manages are mediocre performers. PIMCO Global Advantage Strategy Bond has been average relative to the Morningstar World Bond Mutual Fund Category and PIMCO Global Multi-Asset has underperformed the Morningstar Moderate Target Risk Mutual Fund Category and World Allocation Mutual Fund Categories since inception.
Not to be outdone by PIMCO, BlackRock, Inc. (NYSE:BLK) has recently outlined its investment strategy message of “Investing for a New World” to investors. It touches upon the low yields from cash and traditional fixed income products, volatile investment markets and lack of confidence by investors. We agree with BlackRock that there are investment opportunities out there for proactive, diversified investors. In order for investors to create a more dynamic and diverse portfolio, BlackRock outlined five points of action that investors should discuss with their financial advisors:
- Rethink the Cost of Cash-Reevaluating the opportunity cost that comes from a large allocation to low-yielding cash and money market instruments.
- Go Further for Income-Reevaluating fixed income choices and considering moving out along the credit risk by investing in high-quality corporate bonds or even dividend paying shares. This message resonates with us because we recently composed an analysis report comparing investing in high-dividend yielding stocks versus high dividend growth stocks.
- Open Your Eyes to Alternatives-Consideration of alternative asset classes and strategies, as these strategies are becoming more widely available to retail investors and offer the potential to generate returns that are not correlated with the traditional asset classes, helping to potentially reduce downside risk.
- Be Active About Passives-The typical Exchange Traded Fund tracks a major investment index benchmark. ETFs provide investors a transparent way to gain exposures to diverse investment asset classes.
- Use Your Longevity-As people live longer and potentially retire later, this allows investors to expand their investment time horizon to enable them to keep a prudent level of exposure to risk assets such as equities for longer than they would have previously.
We can appreciate this investment strategy program message better than PIMCO’s New Normal. We find that PIMCO’s message was geared more for academics and economists rather than individual investors and their advisors. We find BlackRock’s “Investing for a New World” strategy to be a more pragmatic and practical investment road map for investors than PIMCO’s New Normal. Our takeaway from BlackRock’s message was a healthy balance of investment optimism based of proactive planning and prudent diversification. Our takeaway from PIMCO’s new normal was that EuroSclerosis was coming to the United States. Our plan of action according to New Normal is we should sell US equities and invest in a combination of bonds and faddish investments dependent on the US doubling down on its socialist-globalist economic model of high taxes on domestic production, low tariffs and trade barriers on imports and government picking winners and losers.
In conclusion, we believe that BlackRock’s investment strategy of “Investing for a New World” is a more proactive and practical investment strategy and message than PIMCO’s “New Normal”. We agree with BlackRock’s management that BlackRock is built for these volatile capital markets and that investors would be better served by utilizing BlackRock’s mutual funds, separate accounts and ETFs instead of PIMCO’s. Though PIMCO is stronger than BlackRock in Fixed Income, BlackRock is still one of the strongest fixed income investment managers in the industry, plus the addition of SSRM, Merrill Lynch Investment Managers, Quellos and Barclays Global Investors gives BlackRock superior resources to PIMCO with regards to equity strategies and alternative asset vehicles.