An award-winning PIMCO fund manager who's crushed 99% of his peers for years told us the 2 trades he's making to stay ahead — and shared his key to credit investing today

  • Mohit Mittal runs three trading desks for PIMCO and is co-managing a growing portfolio of mutual funds.
  • In June, Morningstar named Mittal a Rising Talent in the industry, praising his attention to detail. Mittal says PIMCO co-founder Bill Gross was a key influence in that area.
  • Among Mittal's funds is the StocksPlus Long Duration Fund, which consistently beats 99% of peers. He explained what he's doing with the fund's stock, credit, and Treasury investments. 
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Beating 99% of the competition is the kind of thing that wins people awards.

That's not what Mohit Mittal's citation says exactly. When Morningstar named the PIMCO fund manager and credit expert a Rising Talent in the field in June, it praised his "impressive analytical, quantitative, and leadership skills."

But his growing track record doesn't hurt either. A 13-year veteran at the $1.8 trillion firm, Mittal runs PIMCO's US investment grade, high yield, and emerging market credit trading desks, and he's taking on increasing responsibilities as a mutual fund manager.

Since late 2019, he's been one of the managers of PIMCO's famed Total Return Fund, once managed by co-founder and "bond king" Bill Gross. Mittal says Gross was an important teacher earlier in his career.

"Gross was clearly a legendary investor and taught me, and many of us here at PIMCO, many things," he said. "Not only the principles of macro investing, but also how we should focus on the detail in analyzing every security, and how that focus on detail is essential to our longterm success." 

Some of his most impressive work has come out of the StocksPlus Long Duration Fund, which he runs with two other managers. $10,000 invested in that fund when Mittal joined in February 2016 would have grown to $24,943 today, a gain of almost 150%. The same amount invested in the S&P 500 would have become $16,405.

The fund beat 99% of its peers in 2016, 2017, and 2019 — and it's doing it again in 2020. Slightly more than 50% of its funds are passively invested in S&P 500 futures, with the rest divided between long-term Treasury bonds and investment-grade credit.

Mittal says this allocation creates a fund that should beat the S&P 500 by about 3% to 4% per year.

"We chose to combine these three assets into one fund, and the reason for that was that the correlation between the three assets is low," he said. "That's a pretty good value proposition given kind of the challenges that are faced by active management in equities."

In an exclusive interview, Mittal told Business Insider how he and his fellow managers are handling the actively-managed parts of that portfolio.

(1) Dialing in on credit

Mittal and his co-managers were slightly underweight corporate credit at the start of the year, and sharply reversed that positioning as markets started to recover.

"In April and May, [we were] able to kind of replace Treasuries with the investment-grade corporate bonds," he said. They're modestly overweighting credit today.

The Federal Reserve's asset purchases during the downturn pumped trillions of dollars of liquidity into the market, and that may have saved the US economy for now. But Mittal says his biggest concern today is the surge of leverage in the financial system.

"Investors, particularly credit investors, need to be very focused on the increase in leverage and not just be focused on what the Fed is doing with respect to the credit markets," he said.

He said the combination of growing leverage and poor corporate earnings is even more concerning. So he's investing in the credit of companies that look like they will weather the storm.

"Our focus has been looking more higher quality, which includes technology, defense, healthcare, telecom, and utilities," he said, adding that mortgage securities should continue to do reasonably well as there hasn't been too much housing supply or many foreclosures.

Mittal says he's much more careful about investing in challenged sectors like retail, autos, and energy, but is willing to buy some of those securities if the issuers have good governance and substantial asset protection provisions.

(2) Turning up Treasuries 

"Going into March, we were defensively positioned, had a little bit higher exposure to longer maturity Treasuries, less exposure to credit sectors," Mittal said.

As the market moved into a recovery mode, the fund's managers cut that Treasury bond exposure dramatically. Since June, however, they've dialed it up to about a neutral level. Mittal says that on a scale of one to 10, Treasuries rank at about 5 today. He's also neutral on duration.

While many investors think of Treasury bonds as a defensive asset, Mittal isn't treating them that way because he expects positive returns from each of the components of the Long Duration Fund. Meanwhile its emphasis on high-quality corporate bonds means the Treasury holdings aren't alone in playing defense on the fund's behalf.

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This story was originally published by Morningstar.

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