April 7, 2015
by John Coumarianos
If you thought a stretch of subpar performance would shake a fund manager’s confidence, you’d be wrong in the case of Robert Arnott.
Through Research Affiliates, his Newport Beach firm most famous for its fundamental indexing strategies, Arnott manages PIMCO’s All Asset funds. These include PIMCO All Asset (PAAIX) and PIMCO All Asset All Authority (PAUIX).
Despite the funds’ recent struggles, Arnott displayed an assured mien during a wide-ranging interview on a warm, late March afternoon at PIMCO’s offices. Asset classes poised to beat inflation (especially commodities and emerging markets stocks and bonds) have gotten cheaper lately, he claimed, as deflationary fears have increased, and this has Arnott reasonably upbeat about his All Asset funds’ prospects.
Buy what’s cheap, sell what’s dear, beat inflation
Inflation protection is a key driver behind the strategy of the All Asset funds. The other driver is looking for cheap asset classes. The All Asset funds are funds of funds, where Arnott uses his PIMCO fundamental index funds and a slew of other PIMCO stock and bond funds to get his asset class exposure. The portfolios may look complicated, but the strategy behind them is simple: buy what’s cheap, sell what’s dear and beat inflation in the process.
And if Arnott himself has a relaxed demeanor, the funds have ambitious return goals. All Asset is designed to return inflation plus five percentage points on an annualized basis. All Asset All Authority, which uses leverage and some of PIMCO’s funds that short asset classes, is designed to produce inflation plus 6.5 percentage points.
Beating inflation, but lagging the stated goal
The funds have beaten inflation, which has run at 2.01% per year, but fallen short of their stated goals over the past decade. For the 10-year period through the end of March 2014, All Asset has produced a 5.67% annualized return, while All Asset All Authority has produced a 5.32% annualized return.
Despite inflation-beating returns, the funds have also struggled when benchmarked against a balanced portfolio of domestic stocks and bonds over 3-, 5-, and 10-year periods, represented by the Vanguard Balanced Index Fund (VBINX) in Exhibit 1.
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