Editor's note: This is an extended version of a story published in the May 19, 2008, issue of BusinessWeek magazine.
Each spring, employees of Pacific Investment Management (Pimco), which oversees $810 billion in assets, come together to paint a big-picture view of what secular trends will drive markets. The location and timing of the forum are closely guarded, but it is expected to take place in early May. In 2005 it yielded a prediction that increased leverage would undermine the financial system, so the Newport Beach (Calif.) firm cut exposure to risk well before the subprime crisis began. The call was early, which hurt in 2006, but the firm's funds had big returns in 2007. Personal Finance Editor Lauren Young spoke with Mohamed El-Erian, Pimco's co-chief investment officer and co-chief executive, to get his views on the investment environment and themes Pimco may explore this year.
What do you get out of your forum?
I really understood the point of it during the two years I spent away from Pimco at Harvard Management. I met with a lot of investment managers marketing products to Harvard. Very few were anchored by secular, or long-term, views. Even fewer had thought to do what Bill Gross [Pimco's founder and co-chief investment officer] does to great effect using hard-wired, disciplined thinking on such issues as the end of the Cold War, the spread of capitalism in emerging markets, the U.S. productivity surge, and the rise of China's influence on the global economy. If you don't have secular anchors, you get sucked into bad trades.
How does the secular forum work?
We meet once in the spring for three days, and we bring in outside speakers, which helps us blend outside views with internal expertise. Then we have a vigorous discussion. The speakers are given a general topic, but we tell them to take us where they want to go. In 2000, when a speaker focused on China and its emerging importance for the global economy, it touched a nerve. We brought another speaker back in 2002 to talk about more about China. As a result, Pimco was an early identifier of the influence of China on the global economy and markets.
After the forum ends, it's not as if we go back to our desks and forget about it. Every quarter we meet again and talk about cyclical trends and how they can impact the secular outlook.
In your new book, When Markets Collide: Investment Strategies for the Age of Global Economic Change (McGraw-Hill, $27.95), you talk about economic disruptions as part of a maturation process for the global markets. Can you tell us more?
Today's economic and financial disruptions are part of a much larger phenomenon that is yet to be fully embraced by markets and policymakers. The global system is attempting to accommodate the breakout phase in the growth and wealth dynamics of a number of countries. The system is also trying to absorb the financial innovation inherent in the proliferation of structured products. Too many participants in the global system embarked on this journey with blunt instruments, inadequate monitoring, and risk management systems as well as a backward-looking mindset.
The result is an inevitable series of market accidents and policy mistakes. Accordingly, and drawing on what the markets have been signaling, the book documents these fundamental changes. It also suggests ways in which investors and policymakers can navigate the new global realities—by taking advantage of the new opportunities and, critically, also reacting appropriately to the new configurations of risk.