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PIMCO's Largest "Equity" Holding - Gold

Tyler Durden's picture


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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Mon, 05/16/2011 - 08:20 | 1278586 topcallingtroll
topcallingtroll's picture

Gold still has room to run.

But i still expect a brief risk off over the summer.

If gold rises in a risk off environment that would speak volumes.

Mon, 05/16/2011 - 08:24 | 1278594 cossack55
cossack55's picture

Be sure to turn your hearing aid on.

Mon, 05/16/2011 - 08:36 | 1278623 ZeroPower
ZeroPower's picture

By definition, risk off should imply gold up. Or, at least, silver down and gold hard up. But seeing as those 2 are correlated as with the inverse corr to DXY rise (drop), its hard to say in today's world.

Either way, hard to argue summer overall is a tough season for the PMs. 

Mon, 05/16/2011 - 08:43 | 1278640 Caviar Emptor
Caviar Emptor's picture

It already has many times

Mon, 05/16/2011 - 10:22 | 1279059 GetZeeGold
GetZeeGold's picture


....and just did again.



Mon, 05/16/2011 - 08:23 | 1278592 Oh regional Indian
Oh regional Indian's picture

ooooh, big gold holder. How will MSM spin this?

I think everything I'm seeing in the last two-three days is pointing to cards finally coming on the table. The truth, which we've been long told we cannot handle. We shall see.

But, as an aside, when they say they are in gold, is that Physical gold or paper?

Huge difference. Curious.


Mon, 05/16/2011 - 08:28 | 1278599 cossack55
cossack55's picture

Good point. I always assume physical as I hope these people are not brainless.

Mon, 05/16/2011 - 08:26 | 1278595 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

... so, er, not physical gold then?

Mon, 05/16/2011 - 08:28 | 1278602 augie
augie's picture

unicorns bro, buy unicorns.

Mon, 05/16/2011 - 08:27 | 1278600 Temporalist
Temporalist's picture

"A very good protection to what can go wrong"...what could go wrong?

Mon, 05/16/2011 - 08:30 | 1278612 Oh regional Indian
Oh regional Indian's picture

Hah! nice catch temporalist.

What could go wrong indeed? These are the little signals we need to pay atention to.


Mon, 05/16/2011 - 08:28 | 1278604 johngaltfla
johngaltfla's picture

But according to the bald guys on Fast Money it's just an "archaic" metal which just sits there. And they've been very consistent in saying that since oh, $650 per oz.

I'm just sayin'....

Mon, 05/16/2011 - 08:29 | 1278608 Marty Rothbard
Marty Rothbard's picture

I wonder how long it will be before we see gold bonds, again.  Bonds bought with gold, interest paid in gold, and principal repaid in gold.  Thats what they all were before FDR stole the gold.

Mon, 05/16/2011 - 08:37 | 1278619 Temporalist
Temporalist's picture

Unfortunately if you say Gold Bond to someone in the US they start scratching their ass looking for powder to put on it.

Mon, 05/16/2011 - 08:34 | 1278613 NOTW777
NOTW777's picture

very interesting

Mon, 05/16/2011 - 08:35 | 1278614 Temporalist
Temporalist's picture

Manufacturing in New York Cools as Raw-Material Costs Jump

"The Federal Reserve Bank of New York’s general economic index fell to 11.9 from a one-year high of 21.7 in April. Economists in a Bloomberg News survey projected it would drop to 19.6, according to the median forecast"

Mon, 05/16/2011 - 08:42 | 1278639 Coast Watcher
Coast Watcher's picture

oh oh oh is this another "unexpected" drop?

Mon, 05/16/2011 - 08:36 | 1278615 Dejean Splicer
Dejean Splicer's picture

Why no TRF investment in Pathfinder? No hamstrings there, right? I think we know where the TRF target is...

Mon, 05/16/2011 - 08:38 | 1278622 Zing
Zing's picture

And there, in a nutshell, you have it. It is clear which metal smart money is moving into.

Mon, 05/16/2011 - 08:40 | 1278624 Mercury
Mercury's picture

 "The largest position in the fund is gold..."

In a $1.2b equity fund that could easily amount to only a few tens of millions of dollars worth...

Mon, 05/16/2011 - 08:52 | 1278672 CD
CD's picture

3.74% of $1.4B -- fifty-odd million. Still, it's a start, and meant as more of a statement than a market-moving position in the first place. 

Also, the fund held around $730M in fiat of various origins (no USD that I could see) at the end of Q1).

Mon, 05/16/2011 - 08:40 | 1278626 Caviar Emptor
Caviar Emptor's picture

I said it yesterday: Smart money in gold. 

Mon, 05/16/2011 - 08:52 | 1278689 Zing
Zing's picture


Mon, 05/16/2011 - 08:38 | 1278631 Robslob
Robslob's picture

Sorry Robo...your hopes and dreams of PIMPCO coming in and saving the market are pretty much dashed...

Mon, 05/16/2011 - 10:27 | 1279070 GetZeeGold
GetZeeGold's picture


Might want to look at that again.




Mon, 05/16/2011 - 08:41 | 1278643 Internet Tough Guy
Internet Tough Guy's picture

Pimco and central banks buying gold, not silver. Hmm.

Mon, 05/16/2011 - 08:58 | 1278685 Zing
Zing's picture

The Silver Liberation Army will now proceed to junk you into oblivion.

Mon, 05/16/2011 - 08:49 | 1278671 onarga74
onarga74's picture

It's refreshing to see such a depth of analysis..."those guys in China have a lot of gold so we bought some too"...not unlike the hasty removal of Pimco marbles from those QE2 manipulating game changers...plunging into gold at the top and leaving the bond market at the bottom. They should change their name to Dimco.

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."




Mon, 05/16/2011 - 08:56 | 1278691 ivars
ivars's picture

Gold will have a bubble very soon, starting almost now and peaking in October (but NOT silver):



Mon, 05/16/2011 - 08:57 | 1278703 Zing
Zing's picture

Considering the higher Silver beta I will take the other side of that bet.

Mon, 05/16/2011 - 10:23 | 1279061 Bay of Pigs
Bay of Pigs's picture

You said silver would be at $32 this week. If it's not, will you quit posting this rear view mirror bullshit?

Mon, 05/16/2011 - 08:54 | 1278692 Sydneysider
Sydneysider's picture

PIMCO EqS Pathfinder's factsheet, portfolio holdings, etc. at

Mon, 05/16/2011 - 08:55 | 1278697 Josh Randall
Josh Randall's picture

By buying Silver I am in effect BUYING GOLD, because that Gold : Silver Ratio will always seek equilibrium, especially when most in the know understand 15 or 10:1 is what an unmanipulated price ratio should be MINIMUM. So go ahead BIG BOYS at PIMPCO - get your Gold-ON

Mon, 05/16/2011 - 09:03 | 1278716 blazen
blazen's picture

That's right.

There's roughly only 10 times of Silver more available (stored + to be mined) than total Gold available (stored + to be mined). And part of that will never be recovered from industry. GSR will decrease

Mon, 05/16/2011 - 09:14 | 1278749 Internet Tough Guy
Internet Tough Guy's picture

Or you think you are buying something levered against gold, but it's really levered against the paper system...

Mon, 05/16/2011 - 09:21 | 1278776 Iriestx
Iriestx's picture

Their largest position is PAPER gold.  Good luck eating that.

Mon, 05/16/2011 - 10:31 | 1279094 sellstop
sellstop's picture

Yup. Pacific Investment Metals Company.


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