Imagine being in charge of a pool of assets larger than the entire Australian economy?  Well last week Flinders Wealth was fortunate enough to attend an intimate Q and A session with Douglas Hodge the CEO of Pacific Investment Management Company (PIMCO) an investment management firm located in California.

PIMCO manages over $1.5 trillion of mainly bond assets on behalf of clients including super funds, retirees, pension funds and endowments.  PIMCO is synonymous with its co-founder Bill Gross who is known within the financial industry as the “Bond King” – Bill had a very public exit from PIMCO in 2014.

I thought it would be interesting to share a couple of insights provided by Doug and the PIMCO Team from the session about how demographics, central bank policy and the post GFC environment are interacting with each other and impacting financial markets.

• The baby boomers are the wealthiest generation in the history of civilisation.  They have accumulated more assets than any group before them.  They range in age from 50 – 70 and as they transition to retirement their most important financial requirement is “income”.  In the post GFC world it has become a massive challenge for investment firms to generate the much desired income for this generation in a world of low growth and low interest rates.  It’s still hard to get ones’ head around the fact that many countries currently have negative interest rates.  That’s right, you effectively pay banks to hold your money on deposit! 

• One of the consequences of lower global interest rates and the huge amounts of liquidity washing through the system is that the performance between active and passive investment managers has been compressed much closer together.  As a result, people extrapolate this phenomenon and have been pouring money into index funds and Exchange Traded Funds (ETF’s).   ETFs and Index Funds have seen fund inflows of over $1trillion + since 2008.  From a contrarian/cyclical perspective now might be a valuable time to review this proposition.

• PIMCO recently established a global advisory board that includes former US Fed Chairman Ben Bernanke, former British Prime Minister and Chancellor of the Exchequer Gordon Brown and Jean-Claude Trichet a former President of the European Central Bank.  Given the unprecedented action governments and central banks have taken since the GFC to stimulate growth – what is now moving markets in the short-term is not hard factual economic data (unemployment rates, payrolls, wages growth, hours price growth etc.) but the analysis of the wording of statements and interviews with the Central Bankers of the world.   Who said actions speak louder than words!