Managing Director, co-CEO, Pacific Investment Management Co.
Pacific Investment Management Co. of Newport Beach, with $48 billion under management, has proved you don’t need a Wall Street address to be a success. Last year, Pimco bond funds captured the top spots in total returns as measured by Lipper Analytical Services. Pimco was established in 1971 as a subsidiary of Pacific Mutual Life Insurance Co. William S. Thompson, 48, joined Pimco in April as managing director and co-CEO with William Podlich. Thompson recently spoke with Times correspondent Debora Vrana.
What might the passage of Clinton’s budget plan mean for interest rates and in turn, the bond market?
The plan will fall disappointingly short of the $500-billion deficit reduction target. Investor behavior will be significantly altered toward tax-exempt securities, and long-term capital gains strategies--basically people trying to reduce the tax bite. The market is not dumb, it responds to tax changes. In addition, the plan will have a modest one quarter to one-half of a percent negative impact on economic growth projections. But the reasons the bond market has been bullish lately is not Clinton’s package but the continued weak economic activity in the United States and similar or worse situations in the key foreign markets: United Kingdom, Germany, France and Japan. You’ve got worldwide malaise.
Since Pimco invests primarily in fixed-income assets or bonds, could you explain simply how interest rates and the economy impact the bond market?
When interest rates go down the prices of bonds go up and conversely in a rising interest rate market prices go down. The bond market always confuses people because of this. In the stock market, stocks are rising when prices are going up.
You spoke of a worldwide economic slump. What do you predict for interest rates?
We think the inflation outlook is reasonably modest, 2% to 3% sort of numbers for the next couple of quarters at least. While flooding in the Midwest and commodity prices could impact those numbers, the trend does not suggest we’re in for a spike in inflation.
For the U.S. economy we look for a continued sluggish economic environment for the next year or so. The factors we’re seeing that continue to dampen our enthusiasm are such things as low savings rates, large levels of debt and continued consumer conservatism.
Most important is the overlying concern of people who are either jobless or concerned about keeping their jobs, which has created an overall level of caution and restraint.
Are you saying that the sluggish economy will continue to mean a bullish bond market?
The U.S. bond market has now reached a low level in rates, in fact, a historically low level. We probably are nearing the end of the cycle, so a bottoming, flattening (and rebound) to higher rates is probably around the corner. That suggests that we’re probably seeing the end of what has become good double-digit rates of return.
How does this impact your investment strategy?
As fixed-income asset managers we will have to use our investment skills to enhance returns in the U.S. marketplace and look aggressively at the international bond markets.
Which foreign markets look most attractive now?
Several of the European markets are attractive. We think Germany certainly offers an excellent potential for declining interest rates, therefore attractive returns in the bond market. We think France continues to be attractive and we also think the U.K. offers excellent potential. We usually look at these markets on a fully hedged basis, meaning the currencies are converted into U.S. dollars. We currently like the Japanese and the yen market, but we like that “un-hedged,” because while the dollar looks attractive against European currencies, the dollar looks a little unattractive against the yen.
Are there foreign markets you avoid?
There’s talk of some Eastern European markets and they may draw some attention, but I think we need to be a little more certain on what the potential for Pimco and our clients would be. We need to see a little more proof out of Eastern Europe before we get really excited there. I think there are markets in Asia that need to show greater depth and size, such as Korea, the Philippines, Indonesia and Malaysia.
Do you invest in municipal bonds sold by California or Orange County?
We do have equities, but we do not manage tax-exempt securities. Many of our institutional clients are tax-exempt institutions, such as pension and retirement funds. We do manage investments for families and wealthy individuals.
Do you provide your 150 institutional and individual clients with special investment strategies, such as South Africa-free portfolios?
We have several of those, either South Africa-free or portfolios that are sanitized for “sin bonds.” You know, a lot of the public funds and socially responsible funds are looking at investing in non-alcohol, non-tobacco, etc., and we arrange . . . certain portfolios where we do not invest in those issues.
What are your priorities while at Pimco?
I’ve spent the last 20 years in the investment business, the last 18 of which were with Salomon Brothers. The last two years I was in Tokyo running all their Asia operations. I came to Pimco because I think the investment management business is enormously exciting. It’s everything that happens every day, anywhere in the world. My agenda? Well I’m spending a fair amount of time looking at international markets. Pimco has an extraordinary record with the U.S. market, now we are working on expanding our global reach.
