Market Matters: Preaching What We Practice

Below is a weekly update from our Chief Investment Officer, Dr. Scott Lummer. He co-hosts an audio segment entitled “Market Matters.” In this week's show, Scott discusses last week’s market decline, and the potential for market volatility to return to previous levels. He also discusses the news that the manager of the world’s largest mutual fund, PIMCO, resigned to join another fund company. Each week he covers a different piece of investment news focusing on recent events in the capital markets, and relates them to Savant Investment Group’s perspective on investing.

Episode Transcript:

Daphne: Welcome to Market Matters, a weekly discussion about investing in today’s capital markets. I’m Daphne Feng and, as always, I’m joined by the Chief Investment Officer of Savant Investment Group, Dr. Scott Lummer. Scott, we were going to talk about investing in the smart phone era, but instead, I want to talk about two things that happened last week. First, out of nowhere, last Thursday, stock markets around the world fell. The Dow declined by 265 points. What happened?

Scott: We need to talk in percentages, not absolutes. Because over the long term, index values are rising, absolute index movements are less important than they appear to be. The market fell by 1.5% on Thursday.

Daphne: But that is a big move, isn’t it?

Scott: Compared to the past few years, it is. But the market’s been unusually stable the past three years. If we compare it to normal market volatility, it isn’t a big deal.

Daphne: Is this a sign that market volatility is going up?

Scott: If we had several days in a row of that type of movement, I’d be concerned that volatility would be going up. But Friday the market gained most of Thursday’s loss back, and Monday was a more normal day in the market.

Daphne: Let’s shift gears to another big event. On Friday morning, Bill Gross, Chief Investment Officer of PIMCO, the world’s largest bond manager, resigned and joined another investment company. That’s unusual, isn’t it?

Scott: It isn’t typical for a person who is so senior to abruptly resign like that.

Daphne: I know we use the fund he managed, the PIMCO Total Return Fund, in most of our client’s portfolios. Does his departure concern you?

Scott: Everything concerns me. But as is the case with all of the managers we use, we know the fund well. We’ve had senior representatives (including a member of their investment committee) in our office twice in the past four months. Yesterday morning we participated in their conference call regarding their management changes. Our investment committee met yesterday and decided that, for now, we’re recommending that our investors should remain invested in the PIMCO funds they currently hold.

Daphne: What factors led to your decision?

Scott: First they have a very deep investment team and the fund is managed with a decentralized process – while Mr. Gross was a spokesman and thought leader, he was far from the only decision maker behind the funds he managed. And unlike other departures of this type, to our knowledge no other senior managers at PIMCO are leaving to join him at his new company. So we think the fund will be fine in the long run.

Daphne: What about the short-term? About 4% of the fund’s assets were redeemed in the first day. Won’t that be disruptive to the fund’s operations?

Scott: The fund’s very liquid and can withstand a large amount of withdrawals

without having to alter its strategy. The disruptions to an investor’s portfolio caused by selling PIMCO funds will be greater than the disruptions of holding them.

Daphne: I know in another situation in which a lead manager left a fund, you sold

the fund out of your portfolios. Why was that different? The main reason is the depth of the team. In the case you’re referring to, there were two key managers of the fund, and they both left within five months of each other. In PIMCO’s case, there are many good professionals involved with the fund.

Daphne: So it seems like it was a clear cut decision to not recommend selling.

Scott: If it was really a clear decision, we wouldn’t have needed to meet. But at the end of our meeting, meeting, we asked ourselves a basic question. We’re not just advisors; we’re investors on our own, and we considered what to do with our own positions. The unanimous answer was not to sell. We can’t think of any more prudent investment advice than to preach what we practice.

Daphne: That’s Market Matters for this week. Thanks to all of you for listening. Please join us next week Scott and I will talk about investing in the smart phone age.


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