Pimco Beats 99% of Peers With Ivascyn as Market Beast: MortgagesCharles Stein and John Gittelsohn
Daniel Ivascyn is a beast.
That’s a compliment coming from Scott Simon, who worked with Ivascyn for 13 years at Pacific Investment Management Co. Rather than relaxing on weekends, Ivascyn likes to spend his days buried in prospectuses.
“He would come in on a Monday and say, ‘Oh My God, this deal’s unbelievable,’” said Simon, who headed mortgage investing at Pimco before retiring last year. “He’s awesome. He has a great sense of risk-reward. A great sense of value.”
Ivascyn’s long hours even by Pimco standards paid off with a promotion to the executive suite. His stellar returns as co-manager of the $29.9 billion Pimco Income Fund propelled him to the post of deputy chief investment officer at the world’s largest bond manager. The title, which makes Ivascyn a possible heir apparent to Pimco co-founder Bill Gross, 69, was part of the shakeup last week set in motion by Chief Executive Officer Mohamed El-Erian’s surprise resignation.
Ivascyn’s performance was a rare bright spot in 2013 for the Newport Beach, California-based firm. Pimco Income’s 4.8 percent return beat 97 percent of peers in a year when the asset manager’s biggest funds on average trailed two-thirds of comparable funds, according to data compiled by Bloomberg. Over the past three and five years, Ivascyn’s fund topped 99 percent of peers, according to Bloomberg data.
“It has been pretty clear for a while that Dan is part of the next generation of leadership at Pimco,” said Michael Rosen, CIO at Angeles Investment Advisors LLC, a Santa Monica, California-based consultant to institutions. “He has done well and he’s a good guy.”
Ivascyn, 44, burnished his reputation during the period following the 2008 financial crisis with bets on mortgage-backed securities. The fund, co-managed by Alfred T. Murata, has had between 40 and 55 percent of its money in non-agency mortgages in recent years, Eric Jacobson, an analyst for Chicago-based Morningstar Inc., said in an e-mail. The securities, which are not backed by Fannie Mae, Freddie Mac or Ginnie Mae, amounted to a bet on a housing recovery since they gain as house prices rise and defaults decline. The non-agency total has included commercial mortgage-backed securities, which have encompassed as much as 20 percent of the fund, Jacobson said.
“Non-agency mortgages were a home run for this fund,” he said.
Ivascyn, a native of Worcester, Massachusetts, would appreciate the baseball metaphor. Simon, who was Ivascyn’s boss for his first four years at Pimco, said he has an undying loyalty to all of Boston’s major sports teams -- the Celtics, Bruins, Red Sox and the New England Patriots -- to the irritation of colleagues whose teams don’t win as much.
“He’s that Boston guy nobody likes,” Simon joked.
Pimco declined to make Ivascyn available for an interview.
Before joining Pimco in 1998, Ivascyn worked at Bear Stearns Cos. in the asset-backed securities group, and at T. Rowe Price Group Inc. and Fidelity Investments. He has a bachelor’s degree from Occidental College in Los Angeles and a master’s of business administration degree from the University of Chicago.
Simon said Ivascyn’s forte is dissecting complex credit structures. His fund, which invests in everything from bank loans to emerging market debt, carries more risk than a typical core bond fund, such as Pimco Total Return. With a yield of 5.4 percent, Pimco Income is aimed at investors looking for a high level of current income.
As the subprime mortgage crisis toppled financial firms in 2008, Pimco Income had limited exposure to these non-agency securities, Ivascyn told Barrons.com in 2012. When other investors dumped the securities as prices plummeted, Ivascyn, who heads Pimco’s mortgage credit portfolio management team, added to his position.
Ivascyn’s timing was perfect. Prices of the securities rose 32 percent in 2009 and 21 percent in 2010 before falling 4 percent in 2011, estimated Bryan Whalen, a portfolio manager at TCW Group Inc., whose funds have benefited from non-agency MBS.
The housing rebound beginning in 2012 helped reduce the number of defaults on non-agency mortgages, making more cash available to investors and boosting their prices. They jumped 28 percent in 2012 and 10 percent last year, Whalen said.
“We didn’t die on the way in and we made a ton of money on the way out,” Simon said of the credit crunch. “And a large part was due to Dan.”
Morningstar this month named Ivascyn and Murata Fixed Income Managers of the Year for 2013. The group praised the duo for putting up strong results during difficult bond markets.
Pimco Income has two separate buckets to cope with different economic scenarios, Murata told Morningstar in an interview on its website. One contains high-yielding assets that can do well if the economy strengthens; a second has defensive investments, such as U.S. Treasuries and Australian government bonds, that will hold up in a weaker economy.
Ivascyn said non-agency securities have been the most attractive choice in the riskier category, which also includes high-yield and emerging-market bonds. Non-agency bonds are “a sector that remains attractive, but its attractiveness versus other credit-related sectors has narrowed,” he told Morningstar.
Ivascyn has reduced the fund’s exposure to non-agency securities over the past several months. He said he has been adding to holdings of Treasuries as interest rates have climbed.
“For quite some time we had next to no exposure to U.S. Treasuries because we thought yields were low versus other things we could do,” he said.
Ten-year U.S. Treasury notes yielded 2.75 percent as of 6:55 a.m. in New York, Bloomberg Bond Trader prices show, up from a 2013 low of 1.63 percent. The yield will rise to 3.37 percent by the end of this year, according to the weighted-average estimate in a Bloomberg survey of analysts.
Pimco Income has had flops too. The fund began buying the debt of Eike Batista’s Brazilian energy company, now called Oleo & Gas Participacoes SA, in the second quarter of 2012. By Sept. 30 of last year, the fund owned bonds with a face value of $177 million, according to Bloomberg data. The company, which filed for bankruptcy in October, has seen the price of its benchmark bonds fall to 6 cents on Jan. 23 from 90 cents at the end of
While Ivascyn’s fund has soared, Gross’s $237 billion Pimco Total Return Fund has stumbled. The world’s largest bond fund lost 1.9 percent in 2013 as Gross was tripped up by wrong-way bets on U.S. Treasuries and inflation-linked bonds. Investors pulled $40.4 billion from Pimco Total Return last year, and added $7.7 billion to Pimco Income, according to Morningstar data. The Total Return Fund also underperformed in 2011 when it missed a rally in Treasuries. Gross, in a letter to clients, called that year “a stinker.”
El-Erian, 55, who rejoined Pimco in 2007 and also held the title of co-CIO with Gross, was widely viewed by investors as the heir apparent. El-Erian told Gross that he was leaving to recharge his batteries and write a book.
Gross told Bloomberg News that he intends there to be a number of heirs apparent. He plans on appointing other deputy CIOs specializing in equities, global bonds and other asset classes. Last week, Andrew Balls, the head of European fund management, was named along with Ivascyn as deputies to help oversee Pimco’s $1.97 trillion in assets.
Steven Roge, a money manager with Bohemia, New York-based R.W. Roge & Co., which oversees more than $220 million, said Ivascyn is his favorite horse in the race.
“He is my number one pick to succeed Bill Gross,” said Roge, who places money with Ivascyn’s fund. “He has been their most successful investor.”