PIMCO's Largest "Equity" Holding - Gold
Many have been wondering why Bill Gross, with his atavistic aversion to holding US paper, has not yet branched out into precious metals which are the natural hedge to surging rates (not to mention sovereign default). Probably the primary reason for this is that the firm's flagship credit funds do not have the mandate, nor permission, to invest in such asset classes. As such, the firm's $200+ billion TRF flagship fund, at least, is limited to fixed income securities. However, the same limitation does not apply to the firm's other funds, especially the recently launched $1.2 billion equity fund, the Pimco EqS Pathfinder. The fund was launched in 2009 under the stewardship of Anne Gudefin and Charles Lahr, who jointly ran the $16 billion Mutual Global Discover mutual fund. So in an interview recently granted to Fortune by Gudefin, we were not very surprised to hear her response on what her largest investment position is in: "The largest position in the fund is gold, which we think is a very good form of protection against what can go wrong. We were encouraged by the fact that a lot of the central banks, especially in Asia, are big buyers. We think that's an underlying trend that's very favorable for gold." So to all those asking why Gross does not invest in the yellow metal, here is your answer.Should the EqS Pathfinder fund grow in AUM, one can assume that an increasingly bigger pro rata portion will be allocated to precious metals.
Full Fortune interview:
Q. How do you decide a stock is cheap?
A. I'm really attracted to good business models. We've seen over the years that quality pays, and I'm always looking for companies with high barriers to entry and strong free cash flow generation. I also want to see things that aren't operating perfectly at the moment, so there's a margin for improvement. I look for there to be a number of catalysts for value to be unlocked. Usually it's a new CEO in place, a restructuring program, or maybe plans to spin off or divest noncore assets. During the second quarter of last year we bought BP. Because everyone was so negative about it, we were able to buy very good assets at a very cheap price. Since then it's rebounded strongly, but we still think it's a value.
A large chunk of your portfolio is in consumer staples. Why?
There are very high barriers to entry: The consumer is attached to a brand. It's also a sector that has low requirements for capital expenditures -- generally somewhere between 3% and 5% of sales -- and the Ebitda margins can be in the mid double digits, so they have high free cash flow generation that they can use to pay dividends or make acquisitions. And they benefit from growth in emerging markets. We like Pernod Ricard, which is the No. 2 spirits company in the world. The Chinese consumer is crazy about cognac and, to a lesser extent, Scotch. Some bottles -- not even the most expensive ones -- go for a few thousand euros, so you can imagine the margins. It's insane! But good for the investor. A growing portion of the luxury goods produced in the world are sold in China these days.
We also own Danone, which is the only large food company that gets 100% of its sales from healthy products. It does 50% of its sales in emerging markets, but it's only in about 50 countries, so it can still expand globally. The per capita consumption of yogurt is very small in a number of countries, including the U.S. Americans consume only a quarter of what Europeans consume in yogurt, so the U.S. is like an emerging market.
Pimco's leadership has backed away from U.S. Treasuries, citing factors such as inflation. Has that affected your investing strategy?
It's always something we keep in mind, especially when we're investing in consumer staples, because there will be higher raw material prices. We'll invest in companies that have the No. 1 or 2 market share because they'll be able to pass on a cost increase and do well in an inflationary environment. We don't want to invest in the No. 3 or 4 franchise because they'll be squeezed out by private labels.
Where else are you finding values in the stock market?
In the technology sector, there are stocks that have disappointed. Microsoft is one of our top holdings. It's a fallen angel. The company used to have a high growth rate; now growth has come down, but it continues to generate a lot of free cash flow. And a lot of cash is sitting on the balance sheet, which management can use to do share buybacks. We think it's very cheap for a very unique franchise.
Another company we're invested in is Gemalto, which is a Dutch company that makes chips for phones and banking cards, a growth industry in emerging markets. It also makes secure IDs and passports, which have a very high growth rate.
Your fund has the ability to invest in all types of securities. Other than value stocks, what do you like?
The largest position in the fund is gold, which we think is a very good form of protection against what can go wrong. We were encouraged by the fact that a lot of the central banks, especially in Asia, are big buyers. We think that's an underlying trend that's very favorable for gold.
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