NEW YORK (Reuters) - Marc Seidner, who left Pimco earlier this year just as the fixed income powerhouse was about to be roiled by internal strife, is beating his old boss Bill Gross at a game Gross used to dominate: calling the bond market.
Seidner sensed that last year’s Treasury market upheaval triggered by speculation about when the Federal Reserve would start reducing its bond-buying stimulus - the so-called “taper tantrum” - had left pockets of value in some longer-dated bonds.
At Pimco, to make a big bet Seidner had to seek the approval of Gross, known in financial markets as “the Bond King.” But now as head of fixed income at the Boston-based money management firm run by contrarian investor Jeremy Grantham, Seidner was able to make a counter-intuitive call that bond yields would fall, not rise further as many had predicted.
The upshot? Seidner’s bet was on the money. His core U.S. bond fund is outpacing 98 percent of its peers and easily beating Gross’s Pimco Total Return Fund, the world’s biggest bond portfolio, as the yield on the 10-year Treasury note has fallen roughly 60 basis points this year.
At Grantham Mayo Otterloo & Co (GMO), Seidner’s $240 million GMO Core Plus Bond III, is posting returns of 6.05 percent so far this year as of July 31, according to Morningstar data. By contrast, the Pimco Total Return Fund, with $223 billion in assets, is posting returns of 3.16 percent for the same time period, lagging 77 percent of its category peers.
While there is a huge difference in the size of the funds - and it is much easier to maneuver with a smaller fund like Seidner’s - they are regarded as directly comparable for bond investors.
“There is life after Pimco,” Seidner said in an interview, his first since leaving the Newport Beach, California-based Pimco in January after turning down an offer to become one of Gross’s top lieutenants.
Seidner, 48, resigned just hours before Pimco stunned the asset management world by announcing Mohamed El-Erian’s plan to step down as the firm’s chief executive, the result of a falling out over Gross’s leadership style and investment strategy. Long considered to be in line to succeed Gross as the firm’s top investment executive, El-Erian was also a close confidant of Seidner.
“I personally resigned to Gross,” Seidner said, declining to comment further about their conversation or on the schism between Gross and El-Erian. Seidner had worked at the Harvard University endowment when El-Erian ran it and he joined Pimco when El-Erian returned to the firm from Boston in 2009.
Through a spokeswoman, Gross and Pimco declined to comment on Seidner’s departure or his performance since leaving Pimco, which is part of Germany’s Allianz.
PROBING THE BELLY OF THE CURVE
Last year’s mixed signals from the Fed about when it would cut back on its $85 billion a month of bond buying badly hurt the performance of large sections of the Treasury market, and Seidner sensed the damage was overdone.
For instance, the Barclays Aggregate index that tracks the so-called belly of the yield curve - maturities from seven to 10 years - finished the year with its worst annual performance on record: negative 6.04 percent on a total return basis. The 10-year yield ended 2013 near its high of the year at just above 3 percent.
“The taper tantrum of spring and summer of 2013 left the term premium in the belly of the U.S. curve attractively priced from an historic risk-reward perspective,” Seidner said.
After arriving at GMO, where he is responsible for $21 billion of fixed income assets, Seidner targeted that section of the curve using Treasury futures and interest rate swaps, betting that the winding down of the Fed’s bond buying did not mean the Fed would be quick to raise interest rates.
On Tuesday, the 10-year yield stood at 2.45 percent and last week reached a 14-month low below 2.35 percent. The Barclays 7-10 year Treasury index has a positive total return so far in 2014 of 6.12 percent.
Meanwhile, his old boss Gross eschewed that call, arguing instead that bonds maturing in five to 30 years were “at risk” given reduced bond buying from the Fed. His resulting bias toward the front end of the yield curve contributed significantly to his underperformance.
Another call of Seidner’s that is at odds with the Gross-led Pimco view is that market volatility, which has been suppressed across assets for most of the last year, is likely to pick up.
Shortly after his arrival at GMO, Seidner told his investment team: “Selling options today is like picking pennies in front of the steamroller,” as he stressed that there was little room left for measures of market volatility to fall.
Gross, meanwhile, has bet that low volatility will persist for the next three to five years.
In the last two weeks, the CBOE Volatility Index, or VIX, jumped to its highest levels since March and a main measure of bond market volatility tracked by Merrill Lynch has begun moving higher as well.
Seidner said his focus since leaving Pimco has been building out his team at GMO, with an aim to hire up to a dozen new quantitative and fundamental analysts and portfolio managers. .
Seidner said he recently hired Michael Emanuel, who was portfolio manager at Convexity Capital Management, as GMO’s portfolio manager of global bond markets and interest rates, and Mike Herald, formerly managing director of CRT Capital Group, to build out GMO’s structured finance products and as a non-agency trader.
GMO and Grantham are best known for their strength in emerging markets and big macro calls, often at odds with the rest of the market.
Seidner said GMO is looking to build a fixed-income business that is nimble and flexible and isn’t tethered to any benchmarks.
“I think most firms approach fixed-income the wrong way,” he said. “When someone starts a firm, they have analysts and portfolio managers who are experts in credit, interest rates, government bonds, which creates cheerleaders, not objective thinkers.
“We’re going to build a completely opportunistic approach as objective thinkers who focus on where we are being compensated for risk-taking – not just about security and sector selection because it’s in the Barclays Aggregate Index,” Seidner said.
Reporting By Jennifer Ablan; Editing by Dan Burns and Martin Howell
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