News From Newport Beach

My investor antennae went up after reading that PIMCO's Bill Gross, my investment writer/analyst of choice and global bond guru, had started up an equities research effort, built around a "deep value" approach. To that end, the firm made several key hires, including Neel Kashkari formerly of Goldman, Sachs and a key figure in creating and implementing Fed and Treasury programs for AIG, Bear and Lehman.

Bill was a long-time, perceptive critic of GE's empire-building using the cheap currency available to GE Capital. This took place during go-go markets, when GE was the darling of every conglomerate and industrial analyst on the Street. So now, PIMCO wants to look at public equities with a value approach. That makes me sit up and take notice; it should be a development worth watching.

PIMCO's early strategy for the New Normal was to "shake hands with the government," i.e. own lots of GSE and Government-guaranteed mortgage paper, plus buying high quality corporates and staying high up the capital structure. This approach has proved a winner in spades, and it may continue to outperform, with some adjustments.

The ten year records for alternative investments have been lackluster, and many college endowments are stuck in illiquid investments with portfolio imbalances. According to Kaplan and Schoar (Journal of Finance, Volume LX (4)), the average private equity fund's return net of fees were roughly equal to the return of the S&P 500 for the period 1980-1997. The Venture Capital Index returns for the one and three year periods ending June 30,2009 were -17.1% and 1.3%, respectively. Considering the risks, lackluster is a kind word.

As the world economy recovers, the reward profile for equities should improve, with larger being better (risk adjusted) than smaller, and OUS being better than US. Stay tuned for news from Newport Beach.