For too long, markets have priced in what we called at Pimco an immaculate recovery for Greece -- this notion that the private sector would continue to buy into artificial growth and long-promised fiscal adjustment on the part of Greece and would provide so much financing that it would lower Greece's borrowing costs to such low levels that you could get both fiscal adjustment and growth. We sold Greek holdings early on and stayed on the sidelines rather than participate in the various bond issuances that Greece has made and that have subsequently gone down in value.El Arian notes that Pimco holds no positions bonds of Greece, Spain or Portugal
But interestingly later in the interview he states:(my bold)
What do you like these days in the emerging and developed markets?
At Pimco, we have been and are going up in the capital structure, migrating up the quality side in corporate paper. I like equity and credit exposure in Australia and Canada, interest-rate exposure in Germany. In the U.S. and U.K., I'd look to add inflation exposure on attractive pricing.
German Banks Have Big Investment in Greece
There may be a good reason why German taxpayers are so unhappy about having to lend money to Greece. In effect, they already have. Germany’s financial institutions hold some 28 billion euros, or $37 billion, in Greek bonds, Barclays Capital estimates, extrapolating from International Monetary Fund data, Jack Ewing of The New York Times reports from Frankfurt.
A quick survey of Germany’s largest banks on Wednesday indicates that probably half of that debt — rated “junk” by Standard & Poor’s since Tuesday — sits on the balance sheets of institutions that are owned or controlled by the government. The percentage could be much higher, but outsiders have no way of knowing for sure because bank regulators and many of the banks refuse to disclose precise numbers.
Germany’s existing exposure to Greek debt easily exceeds the 8.3 billion euros that the country would lend to Greece as part of a European Union plan to help the country avoid default on its debt — though not the 24 billion euros that may eventually be needed from Germany. Hypo Real Estate Group alone holds 7.9 billion euros worth of Greek debt. And, after a bailout last year, the taxpayers own Hypo Real Estate.
Germany’s direct exposure to Greek debt provides another reason the country’s problems are very much Europe’s problems. “It’s not just a question of paying for Greece’s luxury pensions. There are intrinsically strong German interests as well,” said Alessandro Leipold, former acting director of the I.M.F.’s European Department.In my view this peek into Pimco's thinking points out a more fundamental issue related to Pimco's active bond management and use of their funds.
But it seems that some of my well known colleagues look at things differently. Here's the bond allocation from a firm highlighted in today's WSJ. I would say only the Pimco Low Duration fund provides anything clost to the "liquidity "bucket" or "umbrella" to withstand financial storms that I look for in my bond allocation
BONDS: There is a 36% allocation to bonds, primarily through bond powerhouse Pacific Investment Management Co., whose funds the advisers have used for more than a decade.
Mr. Voicu allocates 9% to Pimco Total Return, which primarily buys high-quality medium-term bonds, and 6% to Pimco Low Duration, which buys bonds of shorter maturities. The portfolio has two multisector funds that can buy various types of bonds, including risky low-quality bonds. They are Loomis Sayles Bond, at 4%, and Pimco Unconstrained Bond, at 9%. The portfolio's 8% foreign-bond allocation is in Pimco Emerging Local Bond, which buys medium-term bonds of governments and companies in developing countries.
I took a little peek under the hood of the fund at the Franklin Templeton website and found a couple of things that caused me further pause. The fund carries a 4.25% initial sales charge and a .96% management fee. According to the website that chops the funds effective one year return from an impressive 26.23 to 20.89. Still very impressive but still, fees cut the net return by 1/4.Mr. Hasenstab is more than willing to own big slugs of bonds from countries that have virtually no representation in the fund's benchmark, the Citigroup World Government Bond Index, as long as they have strong fiscal policies and healthy economies. That's a move that in most fund companies would have marketing executives complaining about "style drift." For Mr. Hasenstab it has meant stakes in Brazil, Australia and South Korea.
The fund's top ten holdings include Korea, Poland and Russia t fee and depending on share class a front end or deferred load, meaning the fund must outperform an index by more than 1.5% before yielding any net benefit to the investors. The fund also owns California munis, venezuelan and mexican govt paper.
A possible holding for people that believe in aggressive active management for part of their portfolio ? I guess so. But it is certainly not something for the bond part of any portfolio I would manage.