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 Seidner sensed that last year's Treasury market upheaval triggered
by speculation about when the Federal Reserve would start reducing
its bond-buying stimulus - the so-called "taper tantrum" - had left
pockets of value in some longer-dated bonds.
At Pimco, to make a big bet Seidner had to seek the approval of
Gross, known in financial markets as "the Bond King." But now as
head of fixed income at the Boston-based money management firm run
by contrarian investor Jeremy Grantham, Seidner was able to make a
counter-intuitive call that bond yields would fall, not rise further
as many had predicted.
The upshot? Seidner's bet was on the money. His core U.S. bond fund
is outpacing 98 percent of its peers and easily beating Gross’s
Pimco Total Return Fund, the world’s biggest bond portfolio, as the
yield on the 10-year Treasury note has fallen roughly 60 basis
points this year.
At Grantham Mayo Otterloo & Co (GMO), Seidner's $240 million GMO
Core Plus Bond III, is posting returns of 6.05 percent so far this
year as of July 31, according to Morningstar data. By contrast, the
Pimco Total Return Fund, with $223 billion in assets, is posting
returns of 3.16 percent for the same time period, lagging 77 percent
of its category peers.
While there is a huge difference in the size of the funds - and it
is much easier to maneuver with a smaller fund like Seidner's - they
are regarded as directly comparable for bond investors.
"There is life after Pimco," Seidner said in an interview, his first
since leaving the Newport Beach, California-based Pimco in January
after turning down an offer to become one of Gross's top
lieutenants.
Seidner, 48, resigned just hours before Pimco stunned the asset
management world by announcing Mohamed El-Erian's plan to step down
as the firm's chief executive, the result of a falling out over
Gross's leadership style and investment strategy. Long considered to
be in line to succeed Gross as the firm's top investment executive,
El-Erian was also a close confidant of Seidner.
"I personally resigned to Gross," Seidner said, declining to comment
further about their conversation or on the schism between Gross and
El-Erian. Seidner had worked at the Harvard University endowment
when El-Erian ran it and he joined Pimco when El-Erian returned to
the firm from Boston in 2009.
Through a spokeswoman, Gross and Pimco declined to comment on
Seidner's departure or his performance since leaving Pimco, which is
part of Germany's Allianz.
PROBING THE BELLY OF THE CURVE
Last year's mixed signals from the Fed about when it would cut back
on its $85 billion a month of bond buying badly hurt the performance
of large sections of the Treasury market, and Seidner sensed the
damage was overdone.
For instance, the Barclays Aggregate index that tracks the so-called
belly of the yield curve - maturities from seven to 10 years -
finished the year with its worst annual performance on record:
negative 6.04 percent on a total return basis. The 10-year yield
ended 2013 near its high of the year at just above 3 percent.
"The taper tantrum of spring and summer of 2013 left the term
premium in the belly of the U.S. curve attractively priced from an
historic risk-reward perspective," Seidner said.
After arriving at GMO, where he is responsible for $21 billion of
fixed income assets, Seidner targeted that section of the curve
using Treasury futures and interest rate swaps, betting that the
winding down of the Fed's bond buying did not mean the Fed would be
quick to raise interest rates.
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On Tuesday, the 10-year yield stood at 2.45 percent and last week
reached a 14-month low below 2.35 percent. The Barclays 7-10 year
Treasury index has a positive total return so far in 2014 of 6.12
percent.
Meanwhile, his old boss Gross eschewed that call, arguing instead
that bonds maturing in five to 30 years were "at risk" given reduced
bond buying from the Fed. His resulting bias toward the front end of
the yield curve contributed significantly to his underperformance.
Another call of Seidner's that is at odds with the Gross-led Pimco
view is that market volatility, which has been suppressed across
assets for most of the last year, is likely to pick up.
Shortly after his arrival at GMO, Seidner told his investment team:
"Selling options today is like picking pennies in front of the
steamroller," as he stressed that there was little room left for
measures of market volatility to fall.
Gross, meanwhile, has bet that low volatility will persist for the
next three to five years.
In the last two weeks, the CBOE Volatility Index, or VIX, jumped to
its highest levels since March and a main measure of bond market
volatility tracked by Merrill Lynch has begun moving higher as well.
HIRING SPREE
Seidner said his focus since leaving Pimco has been building out his
team at GMO, with an aim to hire up to a dozen new quantitative and
fundamental analysts and portfolio managers.
Seidner said he recently hired Michael Emanuel, who was portfolio
manager at Convexity Capital Management, as GMO's portfolio manager
of global bond markets and interest rates, and Mike Herald, formerly
managing director of CRT Capital Group, to build out GMO's
structured finance products and as a non-agency trader.
GMO and Grantham are best known for their strength in emerging
markets and big macro calls, often at odds with the rest of the
market.
Seidner said GMO is looking to build a fixed-income business that is
nimble and flexible and isn't tethered to any benchmarks.
"I think most firms approach fixed-income the wrong way," he said.
"When someone starts a firm, they have analysts and portfolio
managers who are experts in credit, interest rates, government
bonds, which creates cheerleaders, not objective thinkers.
"We're going to build a completely opportunistic approach as
objective thinkers who focus on where we are being compensated for
risk-taking – not just about security and sector selection because
it's in the Barclays Aggregate Index," Seidner said.
(Reporting By Jennifer Ablan; Editing by Dan Burns and Martin
Howell)
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