SUMMARY

  • The All Asset strategies have access to a few sources of long-term real return potential, which arise from our ability to a) systematically execute contrarian trades through a disciplined contra-trading approach that gradually averages into our positions; and b) consistently access the alpha potential from underlying PIMCO mutual funds.
  • Research Affiliates’ global business cycle model estimates a substantially higher probability of a slowdown in the U.S. and other developed markets today than 12 months ago. For emerging markets, Research Affiliates’ modeled slowdown probabilities have risen since 12 months ago but are significantly lower than for developed economies.
  • Positioning in the All Asset strategies is more constructive on emerging markets within equity allocations, light on credit (both investment grade and high yield bonds), and with some appetite for long bonds (30-year U.S. Treasuries), as well as a preference for plenty of dry powder in the form of short-term and absolute return strategies.

Rob Arnott, founder and chairman of Research Affiliates, discusses why the All Asset strategies’ systematic global tactical asset allocation using active PIMCO funds may offer investors long-term value. Omid Shakernia, senior vice president of asset allocation at Research Affiliates, discusses the growing likelihood of a global economic slowdown signaled by the All Asset strategies’ business cycle model and how this informs positioning. As always, their insights are in the context of the PIMCO All Asset and All Asset All Authority funds.

Q: The All Asset strategies execute a contrarian philosophy, using a systematic global tactical asset allocation approach that allocates exclusively to actively managed PIMCO funds. What gives you confidence that this approach may add value in the long run?

Arnott: In my 40 years as a contrarian investor, I’ve observed that a few principles have tended to drive the long-term value added from a contrarian approach. I’ve often said that what is comfortable is rarely profitable, and that the markets do not reward comfortable investment choices. How does this view work over time? First, mean reversion in prices tends to be “unreliably reliable.” It works in the long run, but fails often enough in the short run to keep performance-chasers in the game. Securities prices essentially represent an unknowable “true” fair value plus or minus an often large and volatile margin of error (noise), which the market is always trying to correct. Because the market is inherently trying to find the true value for every asset, this “noise” essentially mean-reverts to zero.1 Second, I’ve often said that true bargains cannot exist without fear – and that fear cannot exist without a plausible narrative suggesting that things will get worse before they get better.2 Finally, investor behavior creates anomalies in the capital markets that can be systematically exploited by the patient investor. Successful contrarian investing takes time, because fair value may require a very long time to assert its ultimately dominant influence.