Moving Cash from Defense to Offense with Jerome Schneider

Stay tuned after the conclusion of the podcast for additional important information.

RECORDED EPISODE:

GREG HALL: Hey, everybody. Welcome to another edition of Accrued Interest, PIMCO's podcast, dedicated to providing financial advisors and their clients with timely, impactful, and pragmatic investment information and insights. My name's Gregory Hall. I lead the wealth management business for PIMCO here in the United States, and I'll be your host. Today's conversation I'm really excited to bring to you. It's with Jerome Schneider. Jerome is one of my partners at PIMCO.

He runs our short term strategy and liquidity management throughout all of PIMCO which means he's intimately involved with everything that goes on at the short end of the yield curve. And I think this conversation is really timely. If you look at inflows into fixed income so far, year to date it's been robust across the board. We've seen about a hundred billion dollars of flows into the overall category. But a full third of those so far have been into the short term category, which does stand out.

And what that tells us is that you as advisors and your clients, you know, are opting to do a couple of things. One, probably ride out some of this uncertainty by sticking closer to cash. And in that shorter end of the curve, also, I think doing exactly what you should do, which is be really, really thoughtful about where you locate your client's liquidity portfolios and making sure that they're earning the right level of return for the cash that they have, maybe waiting for other transactional purposes.

And then the second reason that I think that this is an important time to have this conversation is a function of, if you've been listening to the podcast over the last five or six episodes, I think we've had some very consistent themes, whether it was in discussion with Dan Ivascyn, our group, CIO, Rich Clarida our economic advisor, who was a vice chair of the Federal Reserve and most recently with Pramol Dhawan and Marc Seidner and their piece that they published about a month ago now and we featured on the pod talking about how equity valuations were quite stretched relative to the value in fixed income. And now we published that piece and we produced the pod, obviously not knowing that we would see a few weeks here of that precise dynamic playing out as policy uncertainty, economic uncertainty have led to a bit of a risk off environment and a pretty significant rally in fixed income.

But it's a really, really natural time for you as an advisor to sort of be thinking about your overall asset allocation, how much risk you've gotten in different buckets. And we think short term is one of those buckets that you ought to be thinking about actively as you help to guide your clients through a volatile time.

And to help us in that conversation today, we also have Chad Van Dyk, Chad representing the great city of St. Louis and its surrounding areas. Chad is one of our account managers who works directly with financial advisors in that region. And he and Jerome have a terrific relationship.

They travel frequently together. They see advisors together. And so we thought nobody better than Chad to join us for this conversation. Jerome, before we get into the meat of today's conversation on short term I wanted to ask you to do a couple things. One, do you mind introduce yourself a little bit to our listeners? You know, a lot of 'em because you get out so much and see so many advisors. But tell us a little bit about yourself. What's your journey? How'd you get to PIMCO?

JEROME SCHNEIDER: Journey is probably unique in some ways and not unique in others. You know, as a kid, I was always fascinated with the financial markets and frankly, thought of myself as probably being the equity markets, not the fixed income markets. But found myself when I came out of university to find myself on a finance desk, a repo desk. And that was really geared toward being in fixed income.

GREG HALL: I'm not gonna ask when that was. We don't need to date you,

JEROME SCHNEIDER: Necessarily. Well, the funny thing, yeah. The funny thing is people look at me and think I'm old or seasoned, but the reality is I don't feel that way at all. The markets are fascinating to me and just invigorating. And so from that perspective, you know, a lot is the same as when I started in 1995. You can do the math. But it's also very different. And, I think part of the context of what we'll discuss here today, and it has to do with cash management, is the simplicity of cash management.

Capital preservation might appear, you know, a fundamental baseline of portfolio management and being an advisor. But the reality is that the environment consistently changes. And you really have to be cognizant of those subtle changes. And probably one of the key takeaways of the discussion today is how do you assess those changes for your clients, for the economy and bring those factors together that you move it from being a defensive mechanism to potentially a ballast to the portfolio, potentially an offensive income generation tool.

GREG HALL: You're, you're in good company. 'cause we did this we did an episode with Dan Ivascyn, our group CIO in January. I asked him the same, you know, how'd you get here? Where'd you come from? And he referenced the same phenomenon. It's just that the market keeps you young, it keeps you curious, it keeps you energized. And, and if you lose that curiosity or that energy, it, you tend not to do as well. So you gotta maintain, you know, that attitude of intellectual engagement with markets. Let me, Chad, tell us a little bit about yourself. Are you a native? Are you native of St. Louis or?

CHAD VAN DYK: I'm native to PIMCO post college. We, and me and Jerome actually started at PIMCO at the same time. I remember Paul McCulley introducing you to the sales desk in New York in the fall of 2008, which was an incredible time to start your career because of getting thrown right into the lion's den. So I think that environment growing up in that, you starting at PIMCO during that period of time is just incredible. But I'm not native to St. Louis.

GREG HALL: No, I think you went there for a reason. Right?

CHAD VAN DYK: I went there for PIMCO and I like it more every single day. And I especially like that Jerome's son goes to Washington University.

GREG HALL: That's right. Well, we're glad to have you representing that in today's conversation. Okay. So the second thing I wanted to ask Jerome to do before we start talking about short term in depth is I feel compelled given everything that's going on in markets right now, and just, you know, I really wonder when we're done recording this, what the headlines are gonna say, you know, half an hour from now. So, Jerome, can you, for the sake of our listeners, can you give us just a, a quick rundown on the last couple of weeks in markets, what we've seen, how we're thinking about it?

JEROME SCHNEIDER: Yeah. And you've alluded to this in the top of the podcast, but, you know, a lot of the things that we've supposed would happen have happened. Owning a bit of interest rate exposure would be beneficial. We've seen rates rally you know, 30 to 40 basis points across the curve. It's become a little bit you know dispersion a little bit across the world. But in the US North America, we generally have seen that. We've also seen risk appetites alter. And I think a lot of that has to do with policy measures.

I'll come back to that in a moment. But the risk appetites are clearly evident by what's going on in the equity markets and the outlook there. And, you know, from a fundamental point of view as highlighted, you know, in some presentations here at PIMCO, you know, part of our reason, the logic, the baseline of that is simply that when looking at the environment, that's probably prone to some volatility, some repricing, we're gonna see that, you know, having some income generating assets are relatively a good place to be.

And we've seen that demonstrated through the past few weeks. But more precisely when you just simply look at the dividend yield, the four dividend yields of the equity market versus owning the 10 year bond or the tenure note or anything else, they're fairly equivalent. In fact, bonds look a little cheaper.

And so there's a baseline here, which probably suggests for most, that perhaps the investment psychology or the paradigm is beginning to shift a little bit. And I think that's part of what the discussions are here in the minutiae, but it's also part of how advisors and clients might have to think about the world and how it's changed from what it was for the past two to three decades. And then that's a different discussion point. But I think that's sort of the outlook.

So in the minutiae of the past few weeks, the focus on policy measures changing, geopolitics changing is effectively shocking the markets and recalibrating the smooth road that they've seen it had, now that's the outlook, that's the expectations, that's the animal spirits we like to think about that might be going back on the other side is policies on the monetary policy side. And that's become a little bit more stable.

In fact, the steady hands there are sort of alluding to, we might have to look through some of the near term concerns of inflation. Might have to look through sort of the near term growth scares. And while the market and PIMCO are suggesting some rate cuts PIMCO to a lesser extent than the market, we might actually see a federal reserve, which is gonna continue to evolve in real time with how things develop and not necessarily have a knee jerk reaction. So that's gonna be interesting discussion. And it probably warrants not necessarily betting on the fed from meeting to meeting, but having a more deliberate outlook on where inflation might be headed over the next year or two. And what that might be doing to the flip side of the coin, which is risk assets,

The market is probably poised to be a little bit more volatile as we recalibrate to these policy measures and the ultimate destination.

And that's something we haven't seen since the global financial crisis. Well, with the exception of the taper tantrum of places like that. We've had generally a very smooth recalibration process for policy measures and things like that. It might be a different world you know, going forward. And that's where an income based generating tool might actually just be…

GREG HALL: Just help us smooth out some of the bumpier edges. Yeah. I hear that and I don't wanna get too deep into outlook and because we're gonna, we wanna talk about short term, we wanna talk about you know, value specific to that space.

But I do think, you know, Chad, as you talked to advisors, you know, I would imagine a lot of appetite right now to, you know, be making asset allocation decisions in addition to you know, the more, you know, more focused, concentrated stock picking or alpha oriented things. Just, Hey, where do I need to be in order to survive this environment of volatility and make sure that my clients feel, you know, really comfortable and that they're in safe hands.

CHAD VAN DYK: I think this is the biggest question that advisors are faced with right now. They're sitting on a lot in terms of preferred deposits, money markets, cash. These investors probably have a balanced portfolio with them already. They're concerned about the volatility. We've gone from pricing in no cuts this year to two cuts, to no cuts to maybe three or four cuts. People are concerned about the volatility, but what I've noticed from clients and advisors is people are thinking about cash as an asset class now.

And hopefully today we can have Jerome get into how you can think about tiering some of that liquidity. I've noticed that people are starting to separate this, you know, from where they have their balanced portfolio and their longer term assets.

JEROME SCHNEIDER: One thing that's interesting, when Chad and I had these discussions, and we have, and I have 'em around, you know, around the globe, is that there isn't a uniform approach to cash management or specifically capital preservation. What we find is that there's different temperaments, different risk appetites, different tenors of cash utilization. And in that process, exactly what Chad was alluding to that cash tiering becomes all that much more important.

And so the starting point is understanding that, you know, from a perspective of cash preservation, it's not a static business, nor is it a static landscape. And so from an investor point of view, the goal of having cash on the sidelines, capital preservation could be very different from one person to the next. So you as an advisor might need to think about a multitude of solutions for your complex needs across your portfolio of client needs.

And that's an interesting construct because from that perspective, you might have one client who has a short term need who has daily, perhaps margin calls or daily cash needs. And they probably should remain in that first tier of cash that we would call money market funds or T-bills. But you also might have clients who have stowed away money waiting for a rainy day or some retirement, or me buying a home or something like that. And that's where a second or third tier of cash that has a little bit longer runway might make more sense.

GREG HALL: Let's, you're, this is exactly where I want it to go. 'cause I do think, you know, for me you know, until I got closer to your strategies and learn more about what you do, you know, cash is cash. Right. And I think for a lot of people, probably not financial advisors listening to us, but certainly, you know, their clients and you know, people out there who don't spend their day swimming through financial markets, you know, cash is, cash is cash.

What's the difference? So maybe I just ask you to step back for one second. Define short term, talk about those tiers. You know, let's understand kinda the full breadth of what you look at in terms of strategies that fall under this moniker of short term or enhanced cash or other liquidity management, all things that we, that we use. Yeah.

JEROME SCHNEIDER: It's a fair question, Greg. So when we think about short term, we think about it in a world of immaturity, if you wanna think about maturities, zero to three years, basically. And that's sort of a big construct. And so we think about everything from overnight liquidity all the way out to approximately a three year term.

There's different, three different pillars, I would say, of being in short term number one, a capital preservation, making sure if you put a dollar in, you get a dollar out when you need to get a dollar out at that point in time. And it might be over a week, month, year. Second thing, liquidity management, thinking about how you can have access to your cash when you think you need it. And that could be tactical, it could be, you know, strategic, something like that.

That is an important construct of liquidity. And the third thing is return. And the return comes in two aspects. The return just simply having some type of return on your money, but it's also the relative return. And I think what we're talking about, we're really focused at PIMCO, is the relative return, because oftentimes the passive default mechanisms for cash management are not necessarily producing the appropriate returns. And we can come back to that in a moment. But those three are the pillars of short term.

GREG HALL: And do you rate 'em kind of in that priority?

JEROME SCHNEIDER: Well, that's the key thing. And when Chad and I have discussions with clients, they're primarily really focused on one of those higher, one of those is being the priority cash capital preservation, or somebody has a liquidity need. So a liquidity need would be an overnight repurchase agreement or a treasury bill or a money market fund, or it could be return.

And more lately we've been focusing on clients that have more of a return need. So they can calibrate. But more importantly, I think it's important to recognize that there's a couple of different roads that lead to allocation to perhaps a short term strategy. Number one, you have what we have today is the wait and see crowd, the de-risking moment of where clients might necessarily come in, not necessarily know where to be, not necessarily enamored with risk assets or equities.

Not necessarily, you know, still the, perhaps the experiences of 2022 and 23 with being, you know, having long interest rate exposure resonates. But it's obviously a different environment now that we're not at zero interest rate environments. So that's number one. De-risking is one element of short term.

The second one is cash management considerations. And we see this from all types of clients, all types of retail clients, pensions, retirements, this is exactly where financial advisors want to think about a dedicated allocation, but also do it thoughtfully. And so having access points to be fill those gaps is exactly that point.

GREG HALL: This is the upcoming tax bill. This is Getting ready for capital calls in your alternatives portfolio, the known cash needs spaced out over, you know, the coming year that's what you're referring to there.

JEROME SCHNEIDER: Exactly! And that brings me to the third point, is just simply cash cheering over different horizons. And we see people sort of create sequential compliments or sequential ladders of strategies which help fill those different buckets to varying degrees. And so the cautionary note is it's great to have liquidity, but it's also recognizing the fact that there's a balance between that defensive liquidity that might yield you less than the federal funds benchmark. And having something that's more active, which allows you to earn additional liquidity premiums and returns above that Fed funds benchmark.

GREG HALL: So that's good. That leads us into what I think is kinda the defining topic of this episode, which is, you know, we've established that there's opportunities to do a little bit better from a return perspective by moving out into tiers of maturity one year, two year, three years. We've established that not all, quote unquote cash investment vehicles are created the same.

And we're gonna get into a little bit of the investment makeup of some of these vehicles as well as we talk. But Jerome, you know, when I, when I think of being so close to the front end of the curve, the thing that I imagine is all the constraints that are put on you in terms of operating, where you're being so careful about capital preservation, you're being so mindful of liquidity and you're trying to create some excess return. What are the tools then that you can use to do better than the manager next to you on behalf of, of PIMCO's clients?  

JEROME SCHNEIDER: Yeah! And I think it's not just the manager that, you know, perhaps PIMCO's competing against, it's also taking a similar framework of how, you know, you advisors might in fact think about it from a practical perspective. And I think that, you know, there is a resource consideration. Fortunately, you know, PIMCO is, you know, has, you know, with our 300 billion in assets in the front end, we're really focused on seeing a balance of, you know, managing corporate credit, managing liquidity, looking globally for opportunities.

But more importantly, we have to, we've recognized that as I, you know, mentioned before, this is a dynamic market. Liquidity is fully dynamic. People generally gloss over the plumbing of the, you know, plumbing of the financial markets. And obviously 2008’s a great example. But my formative years were spent in repo markets and funding markets. And even today, when I get in, you know, at 3: 30, 4 o'clock in the morning, the first thing we look at, I look at…

GREG HALL: West coast time, west coast time, sorry, I want people to know that you are Pacific committed to your job, but not insane. Yeah,

JEROME SCHNEIDER: is' repo markets.  No, that's fair. That's fair. And we look at those liquidity markets as an early barometer of how bank capital might be changing. Bank risk appetite might be changing or cash coming into the market. And that's a defensive, obviously posture. And so we know within the first, frankly, two or three minutes, basically something is off size changing, things like that. But the point is that we think about this as a breathing organism.

And what that means for our portfolios is liquidity is a defensive mechanism, but it also can be an offensive mechanism, meaning you can invest over a horizon that's known and at the same time earn additional premiums, if you will, above the default rates fed funds or something below that, like a treasury bill. So there's some benefit to be had for knowing that and using liquidity.

GREG HALL: When you say that, do you mean in a sense that you can choose when you want to take liquidity or when you wanna be a liquidity provider? And just your intimacy with these markets gives us a sense of when we wanna lean into or lean out of.

JEROME SCHNEIDER: Exactly! And I think your second point there about leaning out, knowing when to sell assets, you know, many people, as in the, you know, in the short term world, are simply buy and hold. They buy a CD and let it mature, then reinvest, right? There's actually a lot of return that's left on the table by not actually selling assets before maturity. And there's some structural reasons for that, et cetera.

So at PIMCO we're actually thinking about not just knowing what to buy for these short term portfolios, but also knowing what to sell when valuations don't make sense. That's an important facet here as well. So understanding that dynamic is important. And so liquidity is first and foremost, the second aspect is diversification. And diversification is incredibly important. And we think about this in a multitude of things.

 We can think about it in terms of corporate credit risk. Obviously 2008 brought that to the forefront of, you know, having, you know, the prime money market funds that weren't diversified and have corporate credit risk. The world's clearly changed then from a regulatory and a functional point of view. But we also have to think about how that diversification works.

And it works not only to minimize or mitigate, I should say, corporate risk or specific idiosyncratic risk with owning a specific bond by a specific issuer. But it also gives you degrees of freedom when you actually want to raise cash as well. So for example, if you have stress in the corporate credit market and you happen to own treasuries or inflation protected securities or mortgages or asset-backed securities, there's several different avenues you can go down.

What we find is generally there's some avenue that is more relative value to dispose of or to buy than another. And that's exactly what we're assessing.

GREG HALL: Right, right, right, right. So I wanna come back to that diversification theme in a bit. 'cause I, we would like to talk about, you know, value in today's market. But I do think you know, one of the things that I always find fascinating talking about with you and at, at I hope listeners will find it fascinating too, but I think the plumbing is really important. And I think that, 'cause you've told me it is.

JEROME SCHNEIDER: Listen, plumbing isn't sexy. And not many people won't necessarily do it, but it's important and essential. And so, you know, like anything in your house, when the plumbing gets backed up, you wanna have, make sure you have a competent if not exceptional technician to help you out. This is the same thing as financial markets.

And so, you know, you may not appreciate, you know, the PIMCO short-term desk day in, day out perhaps, but when times of stress of liquidity come, you know, we're gonna be on the menu of people, the first people you talk to, right? Given our vantage point, et cetera.

And there's a different viewpoint that, you know it, most of the time, 98% of the time markets are stable, things function normally, but it's that 2% that you really wanna understand what's driving force and the secondary effects, which then become the primary reasons of what's the opportunity or what's not the opportunity, and how systemic are those risks.

And I think that's functionally changed the systemic aspect of it, because the Federal Reserve and other central banks have taken measures since 2008 to really get involved. But the world today and the issues and the crisis we had today or yesterday don't necessarily mean the same.

Or they might rhyme with what's gonna be tomorrow, but not necessarily be the exact same. So I think one of the exciting things that you know about the market, not that you're hoping for chaos or anything like that, clearly not, but it is fascinating about the financial markets is that there is an organism that continues to evolve. And so you have to continue to think about what the dark corner is of everything as well as the opportunity for everything.

So while as bond guys, bond investors, bond portfolio managed professionals, we might think of ourselves as you know, perhaps a negative, you know, glass, empty glass type of world. The reality is we're actually quite optimistic and we're looking for those opportunities, you know, out of our right eye to figure out, Hey, what's the right tail of risk in this situation despite all the concerns and, you know, management issues that might come.

CHAD VAN DYK: Volatility works to our advantage.

JEROME SCHNEIDER: Volatility works to our advantage within reason. And I think, you know, from an investor point of view, like what we're saying is manage your volatility in different ways and you might have to have a higher cash allocation or higher fixed income allocation, but at the same time, that doesn't mean being dead in the water. And that's really, you know, the focal point of here that diversification brings within that cash management landscape. 

CHAD VAN DYK: Well it's the balance of those risks, which I think we would encourage investors to think about. Your background is in structured credit, we've seen high yield corporate spreads, investment grade corporate spreads widen just recently in the face of equity markets selling off and the risk off environment that we've been in. So how do you think about balancing those risks within a portfolio, credit as well as maybe liquidity?

JEROME SCHNEIDER: Yeah. You might find those as opportunities in the minute to minute, hour to hour changing headlines. But the reality is that you have to put it in context. Credit spreads have widened, but they haven't widened as much as equity risks. So should they potentially have moved to widen more?

I think what we have to think about is that portfolio construction that might have been overweight corporate credit coming outta the financial crisis because of that warm blanket that the Federal Reserve and other central banks provided has sort of slowly dissipated. And it's not that we're calling for a series of defaults, but there's different sectors, different allocations, which might warrant a smaller allocation size. And that means we have to be diversified focusing on higher quality assets. Mortgage backed securities, as you heard from my colleagues, you know, we do like those agency mortgages are quite attractive.

And the way we're thinking about it at PIMCO in the short term strategies is agency floating rate securities, agency CMOs as a compliment, and they're a part of our portfolio. They're not the entire portfolio. And I think that's another thing to really take away here, is that the diversification is incredibly important.

Not just owning a high quality asset, not just owning a triple-A rated asset-backed security that might have qualities of being the top tier. You know, that, you know, too much of anything is not good. You know, you can't, a glass of milk is fine. A gallon of milk may not be fine. And so I think that's how investors have to approach their cash as well in terms of that diversification.

GREG HALL: That's an interesting point. I mean, you know, I, I'd say one just to, to tease out some valuation themes, you know, we, as a firm, I think we've been pretty vocal about our preference to move up in quality tiers as we perceive more volatility risk, more actual, you know, credit risk, or at least, you know, if not necessarily fundamental, but certainly with spreads as tight as they are, less room for positive surprises.

In corporate credit we've been, we've clearly been in favor of mortgage risk and consumer risk generally. So it doesn't surprise me at all to hear you reference agency CMOs, but you did so in the context of a diversified portfolio. And I think the ability to move away from that viewpoint, you know, as soon as you see relative value pop up in another location, and I wonder to what extent that just is by virtue of one, as we joked about early on, you've done this for a really long time,

JEROME SCHNEIDER: Thank you for my ability. It shows how old I am,

GREG HALL: So you've seen hot asset classes come and go. But then also you have a process, not necessarily an asset class vision of what you do, meaning, I think you put the world through your funnel and you see what comes out. You don't go into the market saying, my job is to buy this, this, this, and this. Over and over and over again.

JEROME SCHNEIDER: Yeah, you bring a really good point. And cash managers of all types, corporate CFOs, you know, central banks, they do a sorting process. And the sorting process isn't defined by relative value. It's defined by yield. And they say, okay, here's a high quality asset, here's a certificate of deposit, here's, you know, here's a bank account, here's a time deposit. And it gives me the best yield possible.

And in that process, what we find is clients of all types get concentration risk. And this concentration risk is pervasive. It's a risk that many people underestimate until something like the regional banking crisis happens. And we clearly saw that as a problem from operational cash point of view. And so we would suggest all liquidity managers a personal, the money in your wallet as an individual or an advisor or a consultant, these are all factors which come into play in understanding this assessment.

So the diversification is incredibly important. So yield isn't the proper sorting mechanism, it's relative value and returns. And so yield will drive people to single asset class designations and destinations. And it may necessarily be the opportunity given liquidity give up or given other constraints as the market conditions evolve or devolve.

GREG HALL: I, can I, sorry, I, but I do want to just pull on the thread a little bit because I think it, like, just to maybe move to zoom out from the short term conversation a little bit. There has been over the last, you know, few years a swelling of interest in single asset class vehicles. We see this in the private markets, we see it in the public markets.  

And I do think it's kind of interesting 'cause you certainly see it, you know, in your market. Jerome, the, one of the most popular strategies in short term over the last couple of years, you know, is, has just been a very narrowly defined structured credit approach. And we invest a lot in structured credit. We like structured credit.

It could be absolutely fine, but I would like to just maybe ask you to put a little bit of a pin as you think about the virtues of diversification relative to the risks of concentration. I think you're probably conscious that, you know, some of those narrow strategies may offer a little bit more near term yield potential. So what keeps you from say, you know, moving kind of all into a given area of the market?

JEROME SCHNEIDER: Yeah, I think that, you know, as a professional, you know, we think about diversification in a, through our strategies. And so the goal is to make sure that takes a balance approach where we see an opportunity set. If we thought there was an extreme cheapness, we would obviously be more overweight that asset class.

But I think the caution is one that, you know, in collaboration with other cash management or capital preservation strategy, single asset class, you know, capital preservation strategies that are focused on the ABS sector or otherwise. They can be utilized, but you have to be very judicious with how you utilize, because recall that their tap for liquidity is only one lever in the market. And so, while fundamentally we can do all the credit research of that asset class and underwrite it from a PIMCO perspective, the broader market may or may not do that, number one.

Number two, I think that you, when you actually find yourselves either acquiring those assets or disposing of those assets, there's only so many avenues to do that. And that's just the cautionary tone is make sure the sizing is appropriate for where you think it is. And that even though it's a high quality asset, even though it has maybe triple-A label, it doesn't necessarily mean it has the same liquidity as a treasury bill. And I think that's an important designation to take away, is that liquidity isn't necessarily correlated with rating at all times. 

CHAD VAN DYK: That goes back to these different periods of time that we've seen as well. 08’ taper tantrum 2013. COVID drawdown, even if it's high quality, it could become a liquid very quickly and you could see spreads blow out.

JEROME SCHNEIDER: Yeah. It’s an interesting facet and I think that, you know, you can take this in other arenas, you know as well, you know, we can sort of look more broadly at the marketplace, the evolution of ETFs and things like that. The evolution of ETFs is an incredible liquidity phenomenon. And frankly it's inviting more people to the fixed income landscape that we never thought would be there. And so we obviously welcome that, you know, given the creation of our ETFs at PIMCO 15 years ago.

But it also comes with the rationalization that you have to make sure that you understand the construction, the portfolio management, how it actually works out, and realize, yes, there's liquidity within the ETF from a market maker perspective, but you also have to think about the overall marketplace and the underlying, ‘cause eventually it shows up in that pricing, actually, quite honestly, the bid shows up in…

GREG HALL: Yeah. And just to be clear, you're talking about a single asset, single strategy ETF relative to most of what we do being more of a diversified construct. And I think, you know, as with many things in markets and advisors will be incredibly familiar with this phenomenon, if you want liquidity at the time the asset becomes less liquid, that is usually not a fun experience. And so that's a great elucidation.

JEROME SCHNEIDER: Well, that what I would say is that fun, not fun experience is wider bid offer spreads, meaning, it becomes more costly to obtain that liquidity. Remember my, I often reference this, but you know, there's no such thing as no liquidity. They're just prices of liquidity that you prefer not to transact at.

And so that's the stress situations that, you know, we've, you know, I found, you know, five or six times over my very long career as Greg like to remind me of. So, you know, those are opportunities, but they're also just be mindful and, and you wanna put yourself in as an advisor, as a professional that you and your clients can ride those out without worry. And yes, there might be a little bit of price volatility, but you wanna avoid that default risk, you wanna avoid that inability to create liquidity. 

GREG HALL: Yeah. And have the confidence to stay with your positioning, right, where sometimes from a behavioral perspective, exposing yourself to that degree of volatility can lead to bad decisions too. So…

CHAD VAN DYK: This speaks to how important it is as to what goes on in that client statement for advisors, because a lot of what we see is, Hey, this looks good on my client's statement, which is why you have a lot of performance chasing. And I think we're probably starting to see some of those assets, but we've seen the same thing in the middle market lending space…

JEROME SCHNEIDER: Chad, I like to highlight high the bottom of those client statements is that cash sitting on the sidelines earning less than Fed funds. And so we speak to that as well.

GREG HALL: Yeah, yeah, of course. Well, yeah, statement risk comes in all, in all shapes and sizes. But I think that's true. I think your point is well taken, Chad, that, you know, of course you know, it's no great revelation to say that we, you know, past performance is not indicative of future results course. And we have to, we have all as financial professionals providing advice to, you know, to our clients who need to be thinking about that.

And I, but it's been great having Jerome here with us today to highlight maybe some areas that we think have maybe gotten a little bit too much attention focus again on diversification, achieving goals in the short term space, you know, that are really attractive, but, you know, aren't exposing us to individual risks that we don't want to take on. Last comment…

JEROME SCHNEIDER: I was gonna, I have two last comments, Joe.

GREG HALL: Yeah. I knew you sneak another one in…

JEROME SCHNEIDER: Yeah! Yeah! So I'm bad at that. You know, I grew up in Oklahoma and I grew up in the oil bust. And when you look around as a formative experience, it was good and obviously terrible. Good in the sense that it created a foundation for me to appreciate liquidity and appreciate having something one day and not the next. And that sort of carried through my career.

And so being on the liquidity side of things, even though I'm a portfolio manager who's trying to produce returns for my clients, the liquidity aspect is incredibly important and dynamic in understanding those conditions. So that is continuing to change. We continue to assess it and we welcome clients to interact with PIMCO to understand and get real time views of how we do that. And Chad can help out and other professionals in the field can do that.

The second one is more practical, I guess perhaps for the professionals listening. You know, people are looking for a crystal ball these days. And I think that crystal ball is one that's maybe perhaps cloudy or just different than they're used to. The crystal ball for many years, perhaps two decades or more, has been one that's been derived for capital appreciation, being that you've looked at equities, you bought a stock at a hundred and you sold it at 120.

And that world's formatively changed because now, you know, interest rates are attractive and relative in absolute sense. So that notion of capital appreciation is now more about income-based generation and total return, income plus capital appreciation. And that changes the microcosm of how you think about it.

So the crystal ball has changed. And then as a result of that, the crystal ball in the micro sense and what we've gone through the past few weeks since the beginning of the year, is increasingly clouded by the outlook growth inflation, as we talked about the, at the top of the podcast.

So from our perspective, you know, the need to sort of create balance within clients' concerns and assessment in their portfolio can actually pretty well be complimented by taking a more active approach and balancing the portfolios from an advisor point of view.

We also, would recognize that many advisors, a lot of advisors, and some of those in the ETF segments are just becoming more familiar now with the fixed income landscape.

And it's been something, obviously bonds have been around for hundreds of years, thousands, in fact. And so when we think about it, the notion of income-based generation is something that's not new, but might be new to parts of this audience. And I think it's important just to rationalize it, that, you know, being patient as things move out and reconcile from a policy from a Federal Reserve perspective, might not happen overnight, might not happen over the next few quarters.

And so having that balanced approach is incredibly important to do so. So it's a long-winded number two, but it's important to recognize that in this process that capital preservation and how you shield yourself could become perhaps the clearest crystal ball that you would have at this point in time.

GREG HALL: That's a phenomenal way to end the discussion, I think. I was nervous for a second. You were gonna go back to like Sumerian times, and, but no, I think when the crystal ball gets murky and you find sources of reliable income to insulate your portfolio against volatility elsewhere, it should help you make clearer decisions on behalf of your clients.

And that's you know, on top of everything else we've discussed today, I think that's a great sentiment to, to leave with. So, hey, thank you both for being part of this conversation. Thanks for joining us on the podcast. I can't believe the timing worked out as well as it did, given what's going on in markets. We will be back next month featuring David Hammer talking about the Muni market. It's, it's our April podcast.

It's tax season. So we're featuring our head of munis and we'll probably have more market developments to update you on through the podcast and otherwise at PIMCO. As always, please visit pimco.com. If you identify yourself as a financial advisor, you'll be taken to advisor forum. That's our destination for you as advisors to find what you need quickly and efficiently and bring that information and those ideas back to your clients.

And let me also, just while I'm at it you know, put in a plug here for Jerome, there's nobody on the PIMCO team who is happier to get on a plane and travel around the country and meet with people individually as a group to walk through how we're thinking about things. So if you've got a PIMCO account representative, certainly reach out and indicate your interest, and we'd be happy to come talk to you about all of these topics and more. Thanks guys!

CHAD VAN DYK: Thank you, Greg!