Minutes after last week’s State of the Union address, Neel Kashkari was on CNBC talking about the president’s message and its implications for business and the economy.
The Pacific Investment Management Co. managing director is used to the spotlight. Creating a $700 billion federal bailout package from thin air has that effect.
Kashkari’s work on the Troubled Asset Relief Program—steeped in drama, uncertainty and corporate and public doubt—helped prepare him for his role leading the biggest initiative at Pimco since it started its first municipal bond fund 40 years ago.
The Wall Street whiz with deep political and financial connections was handpicked by Pimco cofounder Bill Gross and Chief Executive Mohamed El-Erian to steer a push into stocks.
“It’s the perfect time to take Pimco’s global expertise and apply them to equities,” said Kashkari, from Pimco’s headquarters overlooking Newport Bay.
Pimco, a mutual fund manager synonymous with bonds, has entered a new era. And Kashkari is the man with the stock plan.
Since taking over as head of new investment initiatives, Kashkari has been running down a list of priorities. Create a stock investing strategy. Check. Launch Pimco’s first stock fund. Check. Build trading desks in New York, London, Singapore and Newport Beach. Check. Find the best stock talent …
“We’re not done yet, but we’ve made a lot of progress,” said Kashkari, who has hired about 25 people to run Pimco’s stock funds.
Pimco, which manages $1.2 trillion in investments for pension funds, insurers, corporations and others, started its first stock fund, the Pathfinder, in April. It now has $1.8 billion in investments.
“It’s growing every day,” said Kashkari in his first sit-down interview at Pimco.
Pathfinder is what’s known as a global deep value fund, where managers scour the world looking for the best value in stocks.
Pimco plans to debut its second stock fund, with a focus on emerging markets, in coming months.
More are expected in coming years.
The company has been diversifying for decades. Pimco began as a government bond manager, then expanded to corporate bonds, currencies, commodities and later funds that mimic stock market indexes.
Funds where managers pick stocks were the next logical step, according to Kashkari.
He downplayed a perception that the move signals Pimco’s belief that the bond rally of the past 30 years has run its course.
“This isn’t a reaction to the bond market,” Kashkari said. “It’s a long-term strategic move.”
Timing may be coincidental. But there are signs that investors are shifting from bonds amid government financial issues and the prospect of rising inflation.
In November, some $1.9 billion was pulled from Pimco’s Total Return Fund, which is made up mostly of bonds and is the largest mutual fund of any type with $256 billion under management.
The 1.5% drop was the fund’s worst month since late 2008, according to Chicago-based fund tracker Morningstar Inc.
Stock Focus
Pimco is betting on emerging economies in China, Latin America and India with its stock funds.
The company sees its knowledge of global economies as an edge over rivals, which include Boston-based FMR LLC’s Fidelity Investments, T. Rowe Price Group Inc. of Baltimore, Franklin Templeton Investments in San Mateo and New York-based BlackRock Inc.
Kashkari is a Washington, D.C., refugee. His time at the Treasury Department nearly ruined him, said the Midwesterner of Indian descent who earned his stripes at Goldman Sachs Group Inc.
When he followed protege Henry Paulson to Washington in 2006 as a senior adviser to the Treasury secretary, Kashkari said he had no idea what he was getting into.
The idea of forming TARP was foreign to a champion of free markets and laissez-faire economics, he said.
Kashkari led the hiring of 140 people, completed 600 transactions and deployed $400 billion to struggling banks, insurance companies and others.
“People were angry, understandably, about the need to bail out,” he said. “We hated it. It violated all of our shared beliefs in free markets.”
But the episode provided an immeasurable experience, Kashkari said.
“In many ways it was a giant startup we were developing in the middle of a crisis,” he said.
By the time Kashkari left in mid-2009, he said he couldn’t wait to escape the politics and cynicism of Washington.
He found refuge in the Sierra Nevadas with nothing but him, his wife, their two dogs, a cabin and enough wood to build a shed. He hacked for weeks on end.
“It was literally detox, getting three angry years out of my system,” he said.
Joining Pimco
After a seventh-month hiatus, Kashkari followed up on some conversations with Pimco’s Gross and El-Erian months earlier.
Their eyes lit up in a meeting with him at Pimco’s headquarters.
Gross and El-Erian were looking for someone to lead growth efforts, including stock funds.
“I wanted to work at a world class financial firm,” Kashkari said. “All things being equal, I wanted to be in California.”
Kashkari got his first taste of Southern California as an aerospace engineer at TRW Corp.
“In many ways this was like coming home,” said Kashkari, who grew up in Ohio rooting for the Cleveland Browns.
In his spare time, Kashkari said he enjoys spending time on Balboa Peninsula, where he’s renting a house.
He often walks his dogs—Winslow and Newsome, named after former Browns’ tight ends—along the shore.
“When I’m here I just like to relax,” he said. n
