(PUB) Investing 2016

15

June 2016

Morningstar FundInvestor

Desai: What’s been driving the volatility in credit this year?

riding the process itself and to prevent any one posi- tion from having an outsized impact on performance.

Kiesel : It’s been an interesting year with a lot of ups and downs. We think the market’s attractive. Overall, what’s been driving the market has been really three things: uncertainty over China, where we’ve gotten, I think, near-term uncertainty resolved a little bit with more stability on the currency front. But as we started the year, people were really worried about China and devalue. Second has been commodity prices—violent swings there. We bottomed at 26 on oil in February, now we’re in the mid- 40 s, so that has recovered. And the third thing has been uncertainty over central bank policy and negative rates. The positive news there is that the ECB is de-emphasizing rates, now moving toward expanding QE and credit easing. We think that Bank of Japan will follow that. So three of the factors--China, commodities, and central banks--are actually improving, and that’s why the market has recovered. Desai: You mentioned commodities. Obviously energy has had a nice little run so far this year. Can you talk a little bit about what you see in that space and how you’re playing it? Kiesel : So back in December the team got together— portfolio managers and analysts—and we thought that we are closer to a bottom. We had input from Greg Sharenow, who also is our commodity expert. Our view was that oil would go, by the end of the year, to 50 . Back then it didn’t look so good. We did a lot of bottom-up research. And in January and February we started buying near the lows fortunately, and we bought a lot of high-quality exploration and production companies. We bought a lot of midstream assets and pipelines. We have seen a big recovery; fortunately we were able to buy close to the lows and that has been a good source of alpha for us this year. K

That said, this will remain a concentrated, high-convic- tion fund. It will continue to hold 25 - 35 stocks. Plus, while individual positions may not grow as large as in the past, the fund may also hold less cash than it has historically; the team said the fund’s stock picks ex- cluding cash have tended to perform better over time than the portfolio including cash. So, the fund’s risk profile will remain idiosyncratic, even though its composition may change. departure and the resignations of two trustees last fall. John Harris will take Goldfarb’s place and will join Poppe as the other internal board member. Board chair- man Roger Lowenstein says there are plans to add another independent trustee before the end of the year. The firm also announced a new firm-level management committee consisting of Poppe, Harris, and Alexander. As for Valeant, its role in the portfolio continues to diminish. After the team sold shares in the first quarter, the position represented about 5 . 4% of assets as of March 31 . Poppe acknowledges that Valeant faces enor- mous challenges and likely will not be a long-term holding. That said, he did not give the impression that the team is a motivated seller, as the company still has valuable assets and it thinks highly of new CEO Joe Papa. It can be difficult to separate Sequoia as it now stands from its incredibly tumultuous recent past. But this fund has been transformed in important ways. This is not to say that these changes will lead to immediate improvements in performance, but, from a governance and structural standpoint, this fund is in a better place. PIMCO’s Kiesel Bullish on Credit PIMCO Investment Grade Corporate Bond PBBDX manager Mark Kiesel stopped by our offices and told Sumit Desai what’s going on and why he still likes credit. Meanwhile, governance remains a priority for Sequoia. Its board is still reshaping itself since Goldfarb’s