PIMCO is seeing a growing business in the private credit market to help pension funds deliver their needed returns, said Emmanuel “Manny” Roman, PIMCO’s chief executive officer.

The unit now represents $27 billion of assets under management for PIMCO, admittedly a small part of the $1.76 trillion it has in total AUM. But there are roadblocks in how much it can grow this segment for now.

“We’ve gone slowly in private credit. Part of the reason is the opportunities are not that scalable. In a downturn, we can deploy more money. So far, it’s been limited,” he said.

To deliver the 7.5%-plus annual return pension funds need to just break even, Roman said “leverage, alpha, and illiquid (markets) are your tools.”

Roman said some parts of the private credit market are attractive, but some aren’t. The lack of liquidity is also an issue. “You can get returns of 8% to 12%. But the cost is your capital is locked up for five to seven years. That’s taking a risk. But it’s also knowing the risk. That’s what you do. It serves the need that pension funds have to get enough of a return to pay the policy holder,” he said.

Roman spoke Thursday at the Morningstar Investment Conference in Chicago, in an interview with a Morningstar moderator. The moderator mentioned this was likely a high margin area for PIMCO, although Roman countered PIMCO doesn’t break out profitability per segment.

Roman also gave his outlook on current market conditions. He said US economic growth should stay healthy enough to keep interest rates fairly low and make a “decent environment for asset return” this year. He said 2020 will bring some volatility because of the presidential election, but added “we’re relatively positive” about the current outlook.

That doesn’t mean PIMCO is blind to risks on the horizon. The high-yield and bank-loan spaces are anything but cheap. “The hunt for yield makes you own credit you shouldn’t own. Be incredibly diligent to not be in the overextended part of the most-risky market,” he said, adding the fourth-quarter selloff was a good reminder why investors should have some risk-aversion positions on now.

He said PIMCO thinks there’s an 80% chance the US will make a trade deal with China, but it will take a while and there will be a lot of gamesmanship between the countries. Even with a deal, Roman said trade issues are likely to be a concern going forward since China wants to be a competitor with the US on technology, a space where the US has dominated.

Technology is a big focus for the firm, whether it is investing enough in backend solutions or exploring new ways to look at data.

“We know what we are good at and what we are not good at. We’re good at identifying risk factors, what will be the alpha, how to size our trade and when to take more risk. It sounds easy, but the amount of data and disaggregation of data to help us to make intelligent conclusions is quite a bit. It’s a long-term process every year [to] find new things to do,” he said.

Some of the research and development PIMCO is working on includes using technology to analyze every single press release from the Federal Reserve and run a textual analysis to see if there is a pattern. This is in addition to discussing Fed policy with former Fed chairmen like Ben Bernanke and Janet Yellen.

“I don’t know what is better. But we have to be willing do to do things differently. What’s dramatically changed is we have different data and ways to link them together, by sentences, images, numbers, and try to drive conditional probability out of it. Some of the things we will try will fail,” he said.

He said one example would be if PIMCO could predict what the consumer price index might be three days before the data was released. “But I don’t know what I’d do with it. That’s not the way TIPS work. We need to try things and see what adds value. But you don’t know if it’s going to work for a while,” he said.

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Tags: Emmanuel Roman, Morningstar, Pension, PIMCO, Private Credit