On any given weekend, Jerome Schneider may dress like a typical surfer dude hanging out in Newport Beach with a scraggly beard and a vintage T-shirt from his high school days.
“My wife is embarrassed by my weekend clothing,” the 45-year-old Schneider said.
“I have T-shirts that are 30 years old that I still wear. Part of my marriage vow was ‘Don’t touch my high school T-shirts.’ It’s a source of joking contention.”
Schneider isn’t shabbily dressed during the weekdays, though, when he’s one of the world’s leading portfolio managers, managing $300 billion in short-term bonds from the Newport Center headquarters of Pacific Investment Management Co., which has $1.7 trillion in assets.
His success can be seen by investors pouring an extra $11.8 billion last year into three of the smaller funds he oversees.
That includes an additional $5.1 billion for his flagship Short-Term Fund (PTSHX), which ended the year with $19.6 billion in assets, and $4.2 billion into the Enhanced Short Maturity Active Exchange Traded Fund (MINT), the world’s largest exchange traded bond fund with $12.1 billion in assets that returned 1.72% in 2018.
In the trailing three-year and five-year periods measured by Morningstar, Schneider’s Short-Term Fund has ranked No. 6 and No. 2 in the world, respectively. The fund has long been a favorite place for large corporations to stash cash, ranking No. 5 in its category for the past 15 years.
“We’ve had a long-standing track record of managing capital,” Schneider said. “Our success here at PIMCO is always a team-based approach. There are a lot of good people who make this firm the success that it is.”
A Record Broken
Schneider, who manages six mutual funds and three exchange-traded funds, had a relatively off year in 2018, but not as bad as the majority of other OC portfolio managers (see separate article, below).
His Short-Term Fund ranked No. 1 for the first 11 months of 2018 but then, like many portfolio managers, reported a tumultuous December, falling to No. 69 as it returned 1.51%, trailing the benchmark Ultrashort Bond index by 11 basis points.
The December performance was negatively affected by currency strategies and holdings of investment grade corporate credit and inflation-linked securities.
The performance broke Schneider’s streak of four straight years in the top 10, including taking the No. 1 spot in 2015 when Morningstar named him bond manager of the year.
On the other hand, he handily beat the Bloomberg Barclays US Aggregate Bond Total Return index, which gained 0.01% and the equity benchmark, the S&P 500, which declined 4.4%, including dividends.
He also topped PIMCO’s Income Fund (PIMIX), which is the firm’s largest with $108 billion in assets that returned 0.58% in 2018.
By January, his fund had returned to the top echelon, with a No. 22 rank and a 0.51% return for that month.
“Starting with a focus on liquidity and minimizing volatility, Schneider will then take measured risks when their rewards appear commensurate,” Morningstar analyst Miriam Sjoblom wrote in a September report.
Morningstar—the finance industry’s most-watched rater of bond funds—gave its second highest rating of silver to the Short-Term Fund, citing its relatively high price tag of 0.45% as “steep” for the category.
14-Year-Old Stockholder
Born in Washington, D.C., Schneider was raised in Oklahoma, where he remains to this day a big fan of that area’s local sports teams.
The stock market caught his attention at a young age. His father took him to New York at age 11, when Schneider walked on the floor of the New York Stock Exchange.
He bought 20 shares of a local company and at the age of 14, attended his first annual meeting.
“I walked up to the owner, gave him some suggestions,” Schneider recalled. “He wasn’t sure what to do with me. It was the first interaction I had with a CEO. It got me hooked.”
He earned an undergraduate degree in economics and international relations from the University of Pennsylvania and an MBA from the Stern School of Business at New York University. He eventually landed at investment bank Bear Stearns, where he worked in London and New York. He recalled the days of ripping faxes off machines so as to quickly sell and buy bonds.
He discovered he enjoyed bonds more than equities, citing problem solving, operational risks and the depth of the market.
Schneider dove deeply into what he calls “the plumbing” of how valuations of bonds and equities get established on a daily basis. Schneider created one of the first financing companies for “repos,” which are repurchase agreements that involve short-term lending for dealers in government securities.
He discovered liquidity—how easy or difficult it is to sell bonds—changes all the time and to this day he uses what he learned at Bear Stearns to create additional returns. He described Bear Stearns as a meritocracy, enabling him to climb the corporate ladder.
“Whenever you solved a problem, they gave you another problem to solve,” he said.
California Dreaming
During the 2008 financial crisis, Bear Stearns unraveled and was eventually purchased by JPMorgan Chase.
When asked about that period, Schneider joked, “What fiasco? I call it a learning lesson.”
“Being in the middle of it was definitely a learning lesson, eye opening,” he said. “People were chasing returns on a leveraged basis that didn’t make a heck of a lot of sense.”
Firewalls that were meant to prevent such calamities came down and he was shocked at how quickly sentiment changed in the market.
“The lesson for me was [to] never underestimate the amount of liquidity you have,” he said. “The reality is you want to be prepared for the worst case scenario.”
After Bear Stearns collapsed, Schneider considered relocating to Asia. However, his wife Stacey wanted him to find a job in California so they could be close to her family, which lives in the Palm Springs area.
“I thought California was the greatest place,” he said. “My inclination was to retire here. I never thought I could work here.”
Then he received a call from PIMCO’s Paul McCulley, who had become famous for coining phrases like “the shadow banking system.” Schneider began in June 2008, watching the crisis unfold from the safety of PIMCO, which famously avoided the meltdown.
Playing in Traffic
Typical of West Coast bond traders, he wakes up daily at 3 a.m. and is on the job at 4 a.m., working a 12- to 14-hour day.
He oversees a team of six portfolio managers in Newport Beach and other managers elsewhere in the world. He manages not only his own portfolio funds, but also dedicated funds from some of the world’s largest corporations and PIMCO’s own cash needs.
“It’s a big job because you have to make sure you have proper liquidity when other people need it. If a portfolio manager buys another asset, we have to have the cash there to pay for it. If a client wants to redeem his funds, we have to have the cash there.”
Along with overseeing others, he also likes to spend five to six hours of his workday trading tens of billions of dollars’ worth of bonds, saying it gives him unique insights into the markets.
“On our desk, [what] we pride ourselves on is that we are not only coaches, but also players.
“A lot of the portfolio managers who are directing portfolio allocations and risks are also trading bonds. As I like to say, ‘I’m not only directing traffic, I’m playing in traffic.’”
As for the U.S. economy, he leans defensive on credit risks, meaning he prefers shorter length bonds.
“This economic cycle is pretty long but that doesn’t mean it is over. What it means is you want to be defensive. You want to be able to differentiate types of corporate credit risks.
“In the last five or six years, it’s been very easy for people to take risks and they have gotten paid pretty well for it. It’s what we call the beta trade, meaning it was the baseline. Everyone has done well because there’s been a lot of liquidity in the market and a lot of good conditions that created an atmosphere for good returns.”
He doesn’t see a crisis similar to 2008, saying the “plumbing is still healthy and there’s enough liquidity to make things function.”
“There’s a big difference between a 2007-08 liquidity crisis and the repricing that we’re seeing in the marketplace today. It’s a rational reaction to what the Federal Reserve is planning to do.”
Unlike other PIMCO managers, who often retire wealthy well before they turn 60, Schneider—who spoke to the Business Journal prior to PIMCO co-founder Bill Gross, 74, announcing his plans to retire from Janus Henderson Investors next month—plans to work another 40 years.
“I made the right choice because I love what I do.”
