PIMCo's El-Erian Warns of the 'New Normal', Says Fed's Moves Could Spur Inflation

Mohamed El-Erian, CEO of the Pacific Investment Management Co. (PIMCo), who popularized the phrase "new normal" to describe how growth will be depressed by consumer retrenchment and tighter financial regulation, says the Fed's purchase of Treasuries will lead to faster global inflation while failing to revive US economic growth.

(October 27, 2010) — Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co. (PIMCo), who popularized the idea of a ‘new normal,’ has said that investors should expect lower-than-average historical returns with greater regulation, lower consumption, slower growth, and a shrinking global role for the US economy.

“It is our base case, but it’s not our dominant case,” El-Erian, who runs the world’s biggest bond fund, said in an interview on “Bloomberg Surveillance” with Tom Keene. “We are looking at a world where there are many possible outcomes. It’s no longer like the old days when we can be confident in just one outcome.” According to the CEO, investors should expect 4% to 6% returns on average and said that gains will come in a “volatile” fashion, Bloomberg reported.

PIMCo has adjusted to a new normal by offering equity funds to investors in April, while moving into stocks to allow customers to diversity their holdings as areas such as emerging markets outperform other regions, Bloomberg reported. PIMCo’s $252 billion Total Return Fund returned about 11.87% in the past year, surpassing about 76% of its peers.

El-Erian has said that the Federal Reserve’s Treasury purchases will accelerate global inflation while failing to lower US unemployment. He has said that he doesn’t believe in the effectiveness of the Fed’s “quantitative easing” program to deliver high growth or low unemployment, referring to the Fed’s strategy of injecting more money into the economy. “QE is meant to drive down the price of safe assets so much that we are all pushed into doing something risky,” El-Erian said in an interview with Bloomberg Monday at a gathering of the Financial Women’s Association of New York.

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To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Warren Buffett has named 39-year-old Todd Combs, a small hedge fund manager, to oversee a portion of Berkshire's roughly $53 billion equity portfolio.

(October 26, 2010) — In a surprising move, relatively unknown Todd Combs has been selected to help oversee a portion of Berkshire’s roughly $53 billion equity portfolio.

“For three years Charlie Munger and I have been looking for someone of Todd’s caliber to handle a significant portion of Berkshire’s investment portfolio. We are delighted that Todd will be joining us,” Berkshire’s CEO Warren Buffett commented in a statement. With the issuance of Berkshire’s announcement, Combs issued a letter to the limited partners of Castle Point Capital announcing his decision to join Berkshire.

Buffett is reportedly searching for candidates to take over his duties when he leaves his post, and has said his responsibilities will be divided among at least three people upon his death or retirement. He has said his son, Howard Buffett, would be an effective non-executive chairman. The big question now is whether he will give the reins to Combs to oversee the entirety of Berkshire.

Buffett’s hiring of the relatively unknown hedge fund manager is unexpected — during the past month, as speculation swirled as to who would assume the top job as the next chief investment officer of Berkshire, Combs did not appear as a likely candidate.

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Some background on Buffett’s potential successor: Combs, of the $400 million Castle Point Capital Master Fund, profited from large gains during 2007 and 2008 by shorting financial stocks, specifically shares of mortgage giant Fannie Mae and reinsurer RenaissanceRe Holdings — a reflection of his success in financial services stocks while limiting risk. While the fund has earned cumulative returns of about 34% since it launched, the S&P 500 index fell 5.1% over the same period.

Combs lives in Darien, Connecticut, grew up in Florida and graduated from Florida State University in 1993 with a major in finance. He moved onto a job with the Florida’s comptroller’s office and from there worked at Progressive, the car insurance company. In 2005, Combs took a leap and decided to branch out on his own to start Castle Point Capital. “His fund has performed well. He is a very good guy and we are sorry to lose him, but we are very proud of what he has become, and it is a real tribute to him that he is being hired by Berkshire,” Chuck Davis, a seed investor for Castle Point, told the Financial Times.