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3 More Rate Cuts In 2025? - Sam Watkins | PIMCO

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welcome to another episode of equity

Mater podcast where we explore what's

possible in the world of investing if

you've just joined us for the very first

time a huge Welcome to our community my

name is Bryce and as always I'm joined

by My Equity buddy Ren how you going I'm

very good Bryce very excited for this

episode you know I am always excited but

one thing that we love to see uh is

accessibility improving for everyday

investors absolutely and uh one part of

the Market that has been less accessible

is uh fixed income yeah just because if

you want to buy bonds directly what

parcel size is normally start at like

$50,000 and if you want to access a bond

fund not many of them are listed so

you're dealing with quite High minimums

unless you have an advisor and can go

through a platform which leaves people

like us out in the cold y until now

that's right today we are joined by Sam

Watkins managing director and head of

Pimco Australia and New New Zealand now

Pimco are one of the world's largest

asset managers and we are fortunate

because they have just launched four

ETFs that now do give us exposure to

this asset class yeah that's right so in

today's episode we're going to chat to

Sam about Pimco get him to make the case

for fixed income because I think for a

lot of investors they're probably

underweight fixed income uh so we'll

make him pitch we'll then talk about the

Eternal debate active versus passive

investing uh yes it exists in the fixed

in come world as well so we're going to

chat about how we should think about

that decision and then we're going to

talk about these new range of active

atfs that have come to Market uh that

have made this asset class more

accessible for Australian investors yes

they've got some pretty bullish

assumptions on where rates go over the

next 12 months as well now before we get

into it we want to say a massive thank

you to Pimco for sponsoring this episode

and helping us keep all of our content

here at Equity mates free and accessible

so with that said let's get to our

conversation with Sam Sam welcome to

equity mates thank you great to be here

so we want to start with an introduction

to Pimco because wels you'd be pretty

familiar amongst the sort of

professional uh Finance industry for

many of the equity mates audience they

may not have have heard of you as much

so can can you give us an intro who is

Pimco yeah and look I think that's

that's that's very true by the way uh

you know Pimco when we do the barbecue

test as we call it where you sort of

mention where you work often it's not a

name that's known that well uh to to

most people um Pimco is a uh a fixed

income manager we're actually the

largest active fixed income manager in

the world our assets under management

are approximately $3 trillion I'm sure

when you say that at the

barbecue get interested

yeah sometimes it ends the conversation

honestly like

okay but uh look Pimco uh it's a it's a

a firm that actually originates from the

US our head office is over in Newport

Beach California and uh that of course

is um you know where the the firm began

nearly was about 50 years ago now uh but

we've been in Australia since 1997 so

very much uh I guess a local footprint

and one that's very well known to the

institutional and the advised Community

here now fixed income for many retail

investors won't form a big part of their

portfolio partly due to accessibility uh

for some of the the funds and and I

guess bonds themselves but then also due

to the low rate environment we've been

through for the last you know decade

post GFC uh QA falling rates uh fixed

interest wasn't really the place a lot

of investors were going but things are

changing so for those new to the asset

class for those thinking about fixed

income again in a you know different

rate environment make the case for fixed

income for us sure so I think as you

rightly mentioned at the start fixing

income hasn't historically been a large

part of retail investors uh portfolios

whereas in the institutional space it

tends to make up as much as 40% now

there's a lot of reasons for that uh but

I'd start off with the defensive

characteristics of fixed income um but

the other aspect that I think is really

important and and you brought that up

around the environment that we find

ourselves in is that interest rates

having gone through the largest increase

in the interest rate cycle uh that we've

seen in over 30 years are now at a level

where they represent very attractive

returns for uh for end investors and so

uh for example the some of the

strategies that we're going to discuss

later on today uh have a uh yield to

maturity that is in the sort of sixes

and even as high as 7% in some of the

strategies so very attractive returns

and an environment that we find

ourselves in at the moment which has a

lot of uncertainty can represent an

attractive alternative to other asset

classes just to contextualize that 6 or

7% like where where is that on average

or sit on on average compared to I guess

the last sort of decade or so it's

easily the most attractive uh level of

yields that we've seen in over a decade

uh so that sort of gives you a rough

idea of how to contextualize that and

the other thing that I think i' I'd use

to contextualize it is that right now if

you were to look at Major Bank uh term

deposits which are often seen as an

alternative somewhere to park your cash

while you're waiting to look for perhaps

a more racy investment um those are

presenting at around about

3.95% so you know with yields in in that

sort of five uh you know plus percent uh

for yield to maturity for the strategies

that I mentioned a pretty attractive

alternative and and one that has a uh

fairly safe and stable uh Outlook that

is defensive now uh Bryce and I here at

Equity mates are quite uh big proponents

of the core and satellite approach to

portfolio construction so how do you see

uh fixed income fitting in a COR and satellite

satellite

portfolio the traditional answer to that

question uh which would be 6040 everyone

I think might have been familiar with

hearing that term of the 6040 portfolio

that would have 60% of your portfolio in

equity or Equity like um exposure 40% in

bonds and fixed income for a traditional

balanced portfolio uh now let's let's

take that as being the midpoint uh

depending on your age stage and uh your

investment objectives that might range

uh from being as low as perhaps 20% for

someone who's very growth focused uh and

as high as 60 or 70% for someone who is

more uh towards the pension phase where

income and stability of assets is

important so very much in the core is

how I would describe it I read somewhere

and it's like very general but you can

you can say 110 minus your age is your

allocation to equities and like that

that like changes over your lifetime

then interesting have you ever heard

that before I I haven't heard that

before very scientific pretty scientific

I was trying to remember as I was saying

I think that's yeah 110 Min age is what

you should have to equi so for example

we're we're in we're 30 so you say 110

mons your age thank you so you say 80%

Equity 20% bonds but then like our

parents who might be you know in the C

70 then it's like 110 minus your age so

then they have 30% no 40% Equity yeah

yeah yeah do your own research yeah

anyway something to think

about so Sam um one of the biggest

debates in the equity markets is active

versus passive and you get people lining

up on both sides of those debate and um

it's it's become you know really big in

the context of the huge boom in passive

index investing over the past 10 years

there is a similar debate in the fixed

income World active vers versus passive

so give us a sense of the debate and

Pimco as an active manager give us why

you think active makes sense in fixed

income look the first point I'd make is

that it's a very worthwhile debate to

have uh it's a debate that I think uh

shifts through time and depending on

what regime that you find yourself in

and certainly is different across asset

classes um beginning where you did with

which is with equities uh I think you

have to look at the data uh you look at

the historic performance uh the um the

data that that I would refer to would be

uh Morning Star research that was put

out late last year uh where it shows

that over the last 10 years

approximately 40% of active Equity

managers have outperformed the Benchmark

so you had to be lucky to make sure that

you were invested with the right manager

and that that manager fell within the

40% every year looking at fixed income

it's actually the opposite story 70 25%

of active managers have beaten The

Benchmark over that same time frame so

you had to be unlucky to choose a

manager who was underperforming The

Benchmark and uh I think taking that one

step further what we hold ourselves to

is our own uh I guess peer group of

fixed income active managers and for

Pimco Over The Last 5 Years uh our

rolling performance for all of the

strategies that we run globally has been

that we have beaten 81%

uh of the median active manager so

pretty good statistics pretty good

numbers that suggest that active uh

Management in the fixed income space has

a strong

Foundation what are the some some of the

I guess characteristics that retail

investors should look for in an active

manager when I guess trying to decide

who who to who to back when considering

an active manager the one of the most

important aspects is the size of the

firm and the resources that are

available because for fixed income the

fixed income indices quite different

from equities are highly complicated so

to put that in perspective into

perspective the S&P 500 funnily enough

it does not have 500 uh shares or stocks

that make it up it's I think believe

it's 503 uh but the uh the Bloomberg

Global Bond U index which is of course

the equivalent Benchmark uh you know

really at a global level has over 35

,000 underlying constituents and of that

35,000 a large portion of those don't

trade regularly so when you think about

how complex that is how hard it is to

make sure that you are managing an

exposure that uh not only matches but

exceeds The Benchmark uh what you

require is an organization with a lot of

breadth and depth to be able to reach

research those individual names and to

be able to transact in those individual

names right across the world so I think

size is an important aspect and then

history and performance I think history

and track record is another important

ingredient yeah and I think for people

who are newer to the fixed income Market

to try and get their head around that

complexity there's for me there's like

four different vectors that they need to

understand it's like the actual issue of

themselves like is it a corporate is it

a government then the duration so you

know is it a short-term bond is it a

long-term Bond if it is long-term how

long does it have left um to its

maturity and then there's credit ratings

as well so people probably heard like AA

a double A B um and then there's also

currency like the the bonds denominated

in so many different currencies and so

the complexity of that market even just

trying to explain it there it's it's

tough to get your head on I I spend my

whole life in that space and it sounds

complicated even when you explain it to

me there um look I I think what you've

done is paint the picture as to why

active management in the space is so

important uh it is a complicated space

it is very hard to access fixed income

as an end investor on a direct basis so

much of what active managers do is uh is

not only you know of course have that

obligation to chaperone towards the best

investments within that space but also

provide access which is not an easy

thing to have so let's ground uh active

decisions in the market of the moment

which is full of uncertainty I think uh

Pimco released a paper recently

uncertainty is certain seems to be the

only thinged know at the moment so uh

take us into the investment uh committee

uh at Pimco or like take us into the

room and talk to us about how the F how

your fund managers are approaching this

moment with that active haton and trying

to maximize outcomes for their clients

we have investment forums each quarter

and uh in each of those quarterly

investment forums the most senior

portfolio managers get together and

debate uh the different settings of um

of our portfolios and we start with the

big picture the macro so as you rightly

say uncertainty is certain that's our

theme at the moment and a lot of that is

being driven by the policy uncertainty

emanating from uh the the US

Administration uh but we also find

ourselves at a place where uh we have a

lot of geopolitical uncertainty uh and

we have Equity valuations that are close

to record highs we have a lot of moving

Parts here that make the landscape quite

an uncertain one so the start point for

us when we're making decisions around

how we construct the portfolios is to

try and design a portfolio that is going

to perform under a number of different

scenarios so of course we design it uh

with a A View to what our base case

might look like but we want to make sure

that it's something that is going to be

uh also um somewhat you know all weather

the other point that I'd make uh looking

at today's landscape and that

uncertainty is certain element of our

our current U view is that we have come

to the conclusion that looking at the

relative um yields that are available in

fixed income you don't have to stretch

out the risk curve uh in order to

achieve an attractive return our

strategies our core view at the moment

is to be up in quality uh and what that

means is to be more at the higher end uh

at the higher rated end of the

investment grade Spectrum uh on average

for our portfolios to increase those defensive

defensive

characteristics and so when you say base

case like perhaps using Australia as an

example like what what is your base case

from a macro point of view yeah so our

base case at the moment is a slowing of

growth uh and uh sticky inflation so uh

not a great mix for investors frankly

andir nice yeah that's right so not a

not not a great sort of base case but I

think the the one thing that maybe some

people you know people can take some

Solace from is that certainly our base

case is not a recession um although we

do see that as being a a higher

probability than it's been for quite

some time in that environment that is

quite uncertain one where we think that

growth is slowing uh inflation you know

we we don't think is going to accelerate

but we think is going to remain quite

sticky um that's an environment where

bonds and fixed income uh perform very

strongly and how how does that extend to

the US uh very similar sort of viewpoint

there uh but Al but with a backdrop of

of course policy uncertainty which at

the moment I think is making the job of

the US Federal Reserve a really tricky

one you know they is I'm sure you know

you're aware have a dual mandate

employment uh and inflation and at the

moment what we feel is that uh where

they may have in the past had some level

of policy flexibility to be ahead of the

curve and uh you know cut potentially in

anticipation uh of a weakening of the

employment Market uh because inflation

is sticky uh it may keep them on the

sidelines for longer than they might

otherwise be that said uh our our view

at the moment is that we will see uh 50

basis points worth of cuts so half a

percent of cuts from the Federal Reserve

uh throughout this year yeah right I

mean we got to ask this question well as

soon as you start talking about rate

Cuts do you have a base case for rate

Cuts in Australia yeah of course it's

something we spend a lot of time

debating um our case sorry our viewpoint

on rates in Australia is that we will

see uh three more rate Cuts this year so

75 basis points of rate Cuts still to

come so Sam on your uh base case for

Australia you said um slowing growth

which you would think okay well the RBA

needs to loosen policy and cut rates but

then sticky inflation which might sort

of temper that uh impulse so how do you

think they balance those two um parts of

your base case and I guess why does

three then become the right number what

we look at uh is the really I guess the

timing of each of those two things which

is to say uh what is the data telling us

about the speed of the economy how fast

will that slow down and how does that

play into where rates are set right now

so the starting point and the starting

point for us uh is a is a view that we

have restrictive settings today which is

to say that if the uh RBA was to move

back to a neutral setting uh there would

already need to be Cuts before you start

to take into account uh what we think is

a softening picture of growth uh and

that's really how we get to the 7 2

basis points worth of cuts and the

expectation is for that to be

represented by three um 25 basis point

Cuts uh and uh and that as I say is is

currently our base case God imagine if

they did three in one Australian housing

market would go crazy oh goodness me I

think unfortunately if they would do

three in one it would be an emergency

and other things might be going terribly

wrong so let's let's not hope for that

no no

no well Sam we're going to take a very

quick pause here on the other side we're

going to dig into the range of new

active ETFs that uh Pimco have launched

that are giving retail investors access

to your strategies but first a quick

message from you guys for over 50 years

Pimco have been at the Forefront of

fixed income investing blending deep

Market expertise with Innovative

strategies with their Rich history in

atfs having been one of the first

managers to list an active Bond ATF in

the US back in 2008 they continue to

focus on delivering innovative solutions

for investors around the world pimco's

new ETF range that we'll be unpacking in

a moment offers Australian investors

access to the same portfolio management

teams the time- tested investment

process and inhouse research that have

helped it to become an industry leader

delivering strong outcomes for their

clients over decades and across every

different Market environment so a

massive thank you to Pimco uh for

sponsoring this episode and helping us

keep all of our content here at Equity

mates free and to learn more about pinco

visit their website pin.com

all right well Sam thanks for bearing

with us there and thank you for helping

us keep our content free here at Equity

mates let's turn to the range of active

ETFs you've launched four active fixed

income ETFs uh in Australia not doing

anything in half measures you love to

see um why was now the right time uh to

launch these as I as you just mentioned

we launched our first active ETF in the

US in 2008 and uh it feels like I'm sure

and and is a very long time between that

and launching in Australia and there's a

few reasons behind that and what really

drove us to look at now as being the

right time to launch the ETFs uh the

first thing is the rate picture and uh

the environment that we're in right now

being one where fixed income as an asset

class is attractive from a return

perspective uh the second one is that

the uh exchang traded fund Market in

Australia uh really has uh grown and

accelerated as uh as an asset class uh

and what we've seen is uh something in

the order of 30% compound growth in that

market over the last decade so really

rapid growth but at the same time the

fixed income asset class is quite

underrepresented in terms of the range

of options that are available for

investors and so we took the decision

that we would uh look to our Flagship

funds that have historically only been

available to institutions and to uh

advisers professional advisers uh and

bring those to The Exchange to open them

up to a broader range of investors it's

uh yeah we love to see it because I

think for years since starting the

podcast we've we've both felt that uh

getting access to this asset class has

been very difficult so I think that's a

good point for us to explore the the

funds uh in a bit more detail can you

take us through the four funds that uh

have been launched so before we go into

detail on each of the funds uh I'll list

those four funds out for you so so the

first one is the Pimco Australian Bond

active ETF which has the ticker of

pus uh the second is the Pimco Global

Bond active ETF that has The Exchange

ticker of

PBF we also have the Pimco Diversified

fixed interest active ETF uh that has

The Exchange ticker of pdfi and finally

uh there is our pinco Global active ETF

uh that has the ticker of

PCD now if you think about how they fit

together and what the key differences

are between them uh the Australian fund

is one that of course is made up of

Australian fixed income securities uh it

is uh very much focused on high quality

uh fixed income it it benchmarks against

uh the Bloomberg um osbond Composite

Index which of course is is what we were

talking about when we were describing

the active versus passive before that

would be your passive Benchmark um and

uh it's a fund that has around about

$2.5 billion worth of assets that are

currently being managed uh within it um

for the Pimco Global bond fund uh that

is the largest fund that we have in

Australia and it's uh 8.3 billion of

assets under management currently and

The Benchmark for that one uh is the

Bloomberg uh Global composite sorry

Global aggregate index and that

Bloomberg Global aggregate IND index is

the one I referred to before that has

over 35,000 constituents uh now that's a

fund um uh that uh is is not just a

large one in Australia but is a very

substantial uh portion of the assets

that the Pimco run at a global level um

the third fund that I mentioned was the

Diversified fixed income fund and what

that is is actually a 50/50 split

between the Australian Bond and the

global bond fund and it's a a very

simple way for people to be able to add

a diversified fixed income exposure to their

their

portfolio uh the final one which I'll

I'll touch on um is the global credit

fund and the Global Credit fund uh that

moves a little bit further out the risk

Spectrum while still maintaining a high

quality investment grade Focus uh which

is to say that there's a little bit less

of the well there is less of The

Sovereign uh that makes up uh that uh

index um and uh the uh Global Credit

fund is one that has around about 1.2

billion worth of assets uh but maybe to

put it in perspective of yields uh

compared to the global Bond index which

has the much higher waiting towards uh

Sovereign or government bonds uh and

that has a yield to maturity of around about

about

6.3% yeah I I did want to ask a question

about the terminology there so it's it's

useful that you've um raise the

difference between the global Bond uh

fund and the Global Credit fund because

um I was was going to ask what's the

difference in this case between bonds

and credit so you mentioned there that

the credit fund has less government

bonds but is there any other key

differences uh well the global bond fund

uh that Benchmark has approximately 40%

of the total Benchmark which is made up

of uh Government Bond issuers uh for the

Global Credit index it's the same

Benchmark without the sovereigns oh okay

so it is it is as uh as simple as that

it's the exact same Benchmark just

excluding the Sovereign the government

issuers yeah okay yeah right and so Sam

for for many of uh the equity mates

listeners today thinking you know um

just here's more ETFs coming to the

market how do you see people use these

four funds is it choosing just one or is

it a mix of both how how would you uh I

guess advise us to to think about the

portfolio construction look the way in

which we would uh propose uh is to start

with your core question of how much

fixed income should you have at a

portfolio level the question as to what

part of that uh should be tilted towards

the Australian versus the global Bond

that'll often be driven by people's

preference uh for where their

performance drivers might come from um

so for example uh we have a number of

clients that are uh much more focused on

a domestic portfolio they will hold

asx200 uh style uh Equity exposures and

they far prefer to have Australian bonds

and then we have others who are more

Global in their approach and uh prefer

to have something which is far more

Diversified uh that will instead use

either a component of of the global Bond

or or perhaps even uh a total sort of

skew towards the global Bond allocation

um the credit fund that I mentioned

before uh is a um move towards a more

performance oriented or performance

focused fixed income so think about that

being one step not a large step but one

step out the risk curve within fixed

income uh and so that is possibly uh

something which is more suitable um as

being a smaller allocation than a core

Global Bond um component or Australian

Bond component uh but one which will add

a higher expected return to uh to your

fixed income allocation nice now uh a

lot of these ETFs the underlying funds

have been around for decades I think

we're having a look the global Bond fund

uh Inception date was July 1998 so more

than 25 years at this point give us a

sense of their uh performance to date

and how how they've gone as unlisted

funds uh so for the global bond fund as

you rightly mentioned it's been around

since 1998 and since Inception the

performance of the global bond fund uh

has delivered after fees around about

half a percent uh of uh of performance

above the Benchmark and of course when

you're talking about what is that 26

years uh 27 years half a percent

compounds to a very large number of you

know amount of out performance

additional return over time uh and

looking at a shorter period of time

which is to say how it's performed in

the last one year uh it's delivered net

of fees uh just under 90 basis points or

or 089 of a perc uh of performance above

the Benchmark so very strong returns uh

over both the uh very very longterm and

the short-term time

Horizon well Sam that uh brings us to

the end of today's episode we thank you

so much for coming in um congratulations

on the launch of of the ETFs we love uh

seeing Global fund managers bring their

their funds to Australia and make them

active uh make them available for us as

retail investors so uh we look forward

to seeing what else comes and uh and

yeah thanks for coming in today

fantastic thank you very much for having me

thanks I will say about investing

everything you do learn is cumulative

what I learned at 20 is use [Music]

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