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America's Top Bond Manager Never Falls in Love

The best manager of bonds in America refuses to pay full price.

by Matthew Winkler

(Bloomberg View) --The best manager of bonds in America refuses to pay full price. He buys his clothes once a year to get a 40 percent discount. He sold his home, put his belongings into storage and rented an apartment in 2006 because he believed home values were inflated. Six years later, when he thought real estate was poised to rebound, he bought another house.

More recently, he purchased the bonds of energy companies after the price of oil traded below $30 a barrel, along with gaming companies, home builders and building-materials makers. He likes to see what he buys, so he went to Macao. He snapped up the bonds of Argentina, Brazil, Chicago, Greece, Illinois, Kuwait, Mexico, South Africa and Saudi Arabia because they were cheap.

Earlier this year, he was hedging optimism about U.S. economic strength by buying Treasury bonds and futures contracts with 10-year maturities. Unlike so many pundits after the November election, he refused to be swept up in the so-called Trump rally, focusing instead on slow growth and low inflation as the Federal Reserve raised interest rates.

He sees no reason to invest in the U.K., where a year after British citizens voted to exit the European Union, the pound is weak, the economy is anemic and inflation is rising.

He doesn't love his investments and vows he will never marry one.

He is Mark Richard Kiesel, manager of the $10.36 billion Pimco Investment Grade Corporate Bond Fund since 2002 and the firm's chief investment officer of global credit.

Kiesel's isn't the most famous name associated with Pimco -- that's still Bill Gross, the co-founder and longtime CIO, even three years after Gross left for Janus Capital Management. Yet Keisel's portfolio keeps giving exceptional returns and is the No. 1 U.S. bond fund over the past 12 months.

"I don't have kids and I refer to it as my firstborn child," Kiesel, 47, said in a telephone interview from his office in Newport Beach, California.

Kiesel's baby is among 79 mutual funds based in the U.S. that are worth more than $5 billion and have a majority of their assets invested in domestic investment-grade bonds. During the past 12 months, his fund produced a total return (income plus appreciation) of 5.3 percent, or 3.4 percentage points more than the benchmark for the funds in the same category, the Bloomberg Barclays U.S. Credit Index, according to data compiled by Bloomberg.

So far this year, only two Vanguard funds investing solely in long-term Treasuries have a slightly better return than the Pimco fund's 5 percent. But the Vanguard funds aren't competitive over a year or longer because they are prone to greater price swings. The Vanguard funds have a volatility of 8.2 percent and 7.6 percent, more than twice Pimco's volatility of 3.5 percent. In other words, Keisel's risk-adjusted return is more than double the Vanguard index-tracking funds, Bloomberg data show.


The Pimco fund also has the advantage of being in the top 25 percent of all comparable funds at any point during the past five years, and has outperformed the benchmark by 41 percentage points during the past 10 years, according to data compiled by Bloomberg.

The fund benefited from Kiesel's anticipation of the Fed's tighter credit stance as the U.S. entered the eighth year of expansion since the 2008 financial crisis. He reacted by trimming government bonds to about 20 percent of the fund's holdings, 5 percentage points less than its weighting a year ago.

On the margin, Kiesel seized the opportunity to obtain deeply discounted bonds of Argentina, Brazil and Mexico with Latin America still in a slump.

Most presciently, he bucked far-fetched U.S. growth forecasts loosed by market exuberance about President Donald Trump. While many investors were tailoring strategies to an expectation of 3 percent annual growth in inflation-adjusted gross domestic product, Kiesel locked in steady long-term returns by purchasing relatively inexpensive futures contracts on 10-year Treasuries amid signs that GDP won't expand much beyond 2 percent. As a result, his fund's government-securities holding outperformed the benchmark by 56 basis points, which alone accounted for 46 percent of the fund's performance advantage over the benchmark.

The Treasury bond rally this year "is a function of declining views of inflation and growth, combined with lots of money chasing yield," said Joel Levington, the global director of fixed income for Bloomberg Intelligence. Despite the Fed's decision to raise short-term interest rates by a quarter point in March and again in June, bonds with maturities of 10 years or greater are outperforming debt securities of shorter duration, according to data compiled by Bloomberg. 

Kiesel's holdings in financial-company bonds performed especially well, beating that benchmark sector by 77 basis points and accounting for 63 percent of his entire portfolio outperforming the market.

His confidence in the financial industry is shaped by his faith in companies that show a realistic appetite for debt as measured by the ratio of total debt minus cash to the value of the company. By that metric, known as net debt to enterprise value, corporate America is handling debt better than it has in decades, putting companies in a strong position to secure financing from banks and other lenders.

"If you can predict where net debt to enterprise value is going for these companies around the world," Kiesel said, "you'll know" what to buy and when to buy it.

Kiesel added that his insights into corporate strengths and weaknesses are amplified by longstanding personal relationships tracing back to his days as a junior credit analyst at Pimco.

"A lot of the chief financial officers and treasurers that I used to talk to now are running the companies," he said. "They're the CEOs and I'm the CIO leveraging a 15-to-20-year relationship with the biggest companies all over the world."

By purchasing long-term debt, Kiesel said he is reducing risk and "building up a much more defensive portfolio for the future," even though his "big picture" hasn't changed.

"The demand for high-quality income-producing assets exceeds the supply of those assets," he said. "If you can find the situations, the unique situations, whether it's a country, whether it's a company, where the fundamentals are actually set to improve, you've got to buy that."

(With assistance from Shin Pei)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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