PIMCO, the leading global investment firm co-founded by bond-market legend Bill Gross, recently announced that it will be launching three new ETFs, two of which are “portable alpha” funds that generate alpha from PIMCO’s fixed income management and “port” that alpha onto equity beta exposure. In addition to the three new ETFs, PIMCO will also be closing four of its exchange-traded funds on October 1. These closures are all country-specific bond funds and will be replaced by PIMCO’s third new ETF, a foreign bond fund.
Portable Alpha ETFs
While portable alpha isn’t a common term in the mutual fund or ETF market, it is an investment technique that has been used for many years within the institutional investment world. The general idea is that alpha generated by one manager (the “alpha manager”), running a particular investment strategy such as market neutral equity, or in the case of PIMCO an absolute return fixed income strategy, can be coupled with the beta from another investment strategy.
Typically, the beta is generated through the use of derivatives since most of the invested capital is allocated to the alpha strategy. Since many derivatives require only small amounts of cash, or none in some cases, to gain the beta exposure, almost all of the invested capital can be allocated to the alpha manager. The coupling of these two investments results in a portable alpha strategy whereby the end investor gets the beta from the derivatives exposure plus the alpha from the alpha manager.
PIMCO’s Portable Alpha ETFs
The idea of running a portable alpha strategy is far from new to PIMCO, and in fact they were one of the pioneers of this strategy with their StocksPLUS approach, which they have managed for institutional investors since 1986. The two new portable alpha ETFs, the PIMCO Fundamental IndexPLUS AR Active ETF and the PIMCO International Fundamental IndexPLUS AR Strategy Active ETF, will gain exposure to fundamentally weighted stock portfolios created by Research Affiliates, while seeking diversification and additional return potential by investing in an absolute return-oriented bond portfolio.
- The PIMCO Fundamental IndexPLUS AR Active ETF will be benchmarked to the S&P 500 Index
- The PIMCO International Fundamental IndexPLUS AR Strategy Active ETF will be benchmarked to the MSCI EAFE Index
Both funds will seek to outperform their respective benchmarks. Bill Gross, renowned co-founder of PIMCO, will manage the PIMCO Fundamental IndexPLUS AR Active ETF. Saumil Parikh, Managing Director and Generalist Portfolio Manager, will manage the International Fundamental IndexPLUS AR Strategy Active ETF.
New Foreign Bond ETF
PIMCO’s third new ETF, the PIMCO Foreign Bond Active ETF, will be managed by Scott Mather, Deputy Chief Investment Officer and head of global portfolio management for PIMCO. The fund, which is U.S. dollar hedged, serves as a replacement for the four funds PIMCO will be closing on October 1: The PIMCO Australia Bond Index ETF (AUD), the PIMCO Canada Bond Index ETF (CAD), the PIMCO Germany Bond Index ETF (BUND), and the PIMCO Build America Bond ETF (BABZ).
The shuttering of the four funds and PIMCO’s addition of three new ones will bring the firm’s ETF offerings to a total of twenty, including both actively managed and indexed products.