Mara Dobrescu: The results of the pan-European Awards for Investing Excellence 2020 are in, and this year, we're taking a slightly different approach. We're announcing the winners across our websites. For the Rising Talent Award our European analysts have taken a hard look at up and coming portfolio managers who may have a somewhat shorter tenure, but over that period have demonstrated excellent investment skills, the courage to differ from the consensus and the strong alignment of interest with fundholders. Now, after a thorough debate between our analysts, we have voted and elected Lorenzo Pagani as the winner of the Rising Talent Award. Lorenzo has built an impressive track record on PIMCO GIS Euro Bond by leveraging an extensive set of performance drivers while at the same time controlling risk.
So, today, I'm very pleased to be joined by Lorenzo. First of all, congratulations.
Lorenzo Pagani: Thank you, Mara.
Dobrescu: PIMCO GIS Euro Bond has built an exceptional track record. What's more, it has done so in very different market conditions. What have been the key ingredients to this success?
Pagani: The key to consistency is not really what you do, but it's how you do it and to be consistent over time. And there are two key ingredients to this. The first one, it's always having an investment process that focus on the long term so that you avoid being distracted by the short-term noise. And the second key component is having a team approach. A team approach is what allows you to benefit from all the expertise that PIMCO has across different markets globally. And this is what leads to a truly diversified global portfolio.
Dobrescu: Now, your strategy includes some exposures that are not frequently found in other competitor portfolios, things like securitized debt, U.S. duration exposure at times. How do you make sure that these aren't adding excessive risks that investors might not necessarily being shopping for?
Pagani: The examples that you have done are exactly what a diversified portfolio can use. But to be able to do this, of course, you need to make use also of the team approach with the risk management because you need to know at every point in time what the risk in the portfolio is and use it as a compass and use it to define what limits you need to have. And it's a daily interaction with risk management that helps portfolio management to be able to know exactly what the risks of the portfolio are every day. And we can do this with the risk measures in terms of limit, in terms of duration, exposure to spreads that we cannot see, but also in terms of scenario simulation of how the portfolio will behave in different market conditions. All of these have to be used.
Dobrescu: And what do you make of the competition from low-cost passive investing? Is that an additional hurdle or a challenge for you as an active manager?
Pagani: I think that the full understanding of the mechanics of the fixed income market should lead to an acknowledgement of the fact that active still has value to add in the current market conditions. First, the fact that in the fixed income market, not all market participants are trying to maximize returns. This means that you can still have inefficiencies. An active management can therefore generate alpha. The second component, which is very important, is the fact that when you think about expected return, it's a combination of the beta return and the alpha return. Especially in a low yield environment, this is where the beta return will be very low. And then, you have to ask yourself whether in this type of environment alpha can still be generated because this can be the major part of your return. And as long as yields are low, but they still are differentiated. So, think about yields are different when you look at different instruments, when you look at different areas of the world or even when you look over time. So, they are volatile. This is what gives the opportunity for an active manager to generate alpha. So, I would say that the majority of the total return exactly in this environment in fixed income will come from alpha rather than from beta.
Dobrescu: Lorenzo, thank you for your time. Again, congratulations on winning this award.
Pagani: Thank you.
Dobrescu: For Morningstar, this is Mara Dobrescu. Thanks for watching.
