Inside PIMCO: Andrew Balls on Managing Billions, AI Investing, and the Future of Credit

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Joe Cass:

[00:00:00] Andrew, welcome. So first question, out the blocks. How do you manage this psychological pressure of making decisions that will potentially move billions of dollars?

Andrew Balls:

It's good to be able to, compartmentalize. It's good. It's good to be able to think about it during the day and then, and then turn off.

And lots of people, who I worked [00:01:00] with in the past would be up all night. And, that's not good. For your, your, longevity in the, the role. I mean, I think with investment management, you, you want to make a distinction between the kind of ex andante decision and ex post decision. So the ex andante.

Decision you control. What do you do? And so when you're thinking about yourself or if you're kind of assessing other people's performance, what do you do, how you make decisions is, you know, obviously. Very, very important. And then ex post, there's what, what happens? That's not something that you, control so you can make good decisions and it goes wrong and you can make bad decisions.

And, and it works out very well. I've certainly done that, in the past. So I think, you know, you do have to sleep. You can't, you know, there are times when it's, when it's stressful and there's times, you know, during periods of market volatility when it's [00:02:00] stressful, if you're underperforming, it is certainly, stressful.

But you, you need to achieve some, balance so that you don't, burn out. And, and nice thing about investment management is, it's an industry where you can do it for a long period of time. I often think if you're, I dunno, trader at a bank, you know, it's kind of a, something that you might do for a few years, but kind of a young person's, game.

But, the nice thing about investment management is having seen different market environments, different periods in terms of the, you know, recent financial history. There's all. Benefits to having a team, that has done it for a long time. And it's interesting at PIMCO, a lot of the, the people I work with, you know, we've all been doing this together for a long time.

My, my direct team, managing global portfolios. We've worked together for, close to 20 years. So, you do have, it is a, it is a, an industry where you can, have great stability over time, [00:03:00] but you know. Just have to be able to deal with, stress is, is probably the answer.

Joe Cass:

So, a bit more of a high level question.

Where do you think public bond issuance is headed in 2026? Both in kind of size levels, but also maybe in growth areas?

Andrew Balls:

So you have growth supply, you have net supply. So net supply takes into account, redemptions. So when you look at, growth supply, global level, everything governments, corporates, mortgages. It's, is relatively, flat over year, over year at a, at a high, level.

Then when you look at net, issuance, then you are gonna see a decline. With decline in terms of government bond, issuance, mortgage issuance in the US will be a bit higher on the forecast, but corporate issuance is gonna be a big, increase in, corporate, [00:04:00] issuance. And you don't know, you know exactly, what it's gonna be, but if you look at the range of estimates like 30, 40, 50% year over year.

Increase in, in terms of net issuance, is, is, is a reasonable, range. A lot of that is being driven by, CapEx, AI related, CapEx, so, you know, led by the, the us, but, but globally, as well. And so this is, this is interesting. Big increase in terms of, issuance in, in corporate space.

You know, opportunities for us quite, possibly, but at the same time. There may be, pressure on spreads, and you're starting in terms of corporate spreads at tight levels, historically. So then to have this, this big, expected increase in terms of issuance, [00:05:00] you know, it's, it seems perfectly plausible that you could see some widening of spreads.

Joe Cass:

Hmm. I wanted to talk a bit more about the data center issuance and I guess the AI boom in general. What do you guys at PIMCO expect from this sector? Not only kind of for 2026, but maybe the next kind of 2, 3, 4 years.

Andrew Balls:

So there's gonna be a lot of, issuance. and it's quite interesting actually because when you look at the numbers over time, you have the potential for technology to, you know, really grow as a sector.

Financials is a very large, part of the corporate market, you know, 20, 25% of, outstanding corporate issuance. You have technology, having the potential to grow into, you know, similar kind of size to financials, potentially depending, you know, a lot of uncertainty. And that's really interesting. In terms of a liquid sector, [00:06:00] the ability to transact, transact in, in size At PIMCO, we, you know, over time we, we've, we're very much involved in, in financials banks, in terms of trading for a number of reasons. We think over time there's, there's some excess return there, but it's also reflecting the liquidity, the fact that you can trade in in large size.

So over time, technology may, become similar in terms of its role in the market. Couple of comments. So as bond investors, you know, the upside is getting your money back. If you are an equity investor, the upside is, you know, big growth in terms of corporate earnings. So when thinking about, AI and CapEx related, investment here. You need to bear that in mind. If you're an equity investor amid all this great uncertainty, you know, you, you have the potential for, you know, really outsized payoffs depending on, you know, the scenario. And I think, you know, huge amounts [00:07:00] of uncertainty about how AI will play out.

In terms of, um. Corporate earnings in terms of impact on productivity, et cetera, et cetera. But, from the bond market, point of view, we need to be a bit careful here and we will be quite careful in terms of technology, the sector, given the extent of the, the issuance. And then you also have to think about sectors which are gonna be negatively impacted.

And so, you know, winners and, losers in terms of this, this big, big, development. And then there will be opportunities that, that, that come across, come along for, for us. And, you know, our approach in, in general would be to be quite careful in terms of corporate, exposure in general, to be quite careful in terms of exposure.

To the technology sector, but then there are great, opportunities. We, we did the, the meta deal, last year, [00:08:00] which was, you know, a very good, opportunity and we hope that we will find, more opportunities like this. And then, you know, Dan Iverson again, keeps, keeps saying this in our internal meetings.

When credit spreads are tight, by historical, standards, there's a lot to be said for going out and, you know, hustling, finding deals, creating deals, structuring deals on terms which work for us, work for the, the issuer as well. Yeah, more bespoke, arrangements. Lending against collateral is something very much in the, the DNA at PIMCO, so asset backed term, finance. So you want to be careful. You know, we, we often make the point that there's nothing kind of magic about private credit. You have a continum public and private credit, high grade, high yield, [00:09:00] lending against, collateral unsecured, lending. For us, you know, investment grade credit, public credit's always gonna be, a core part of our holdings.

You know, one very important difference, obviously between public and private credit is you can trade and public credit, private credit. You, you may not be able to to trade at all or in, in, in limited ways, but when you, I think one of the big benefits of the PIMCO. Platform is across fixed income.

We, we, we can look to take advantage of all of the, the opportunities public. Private credit is one example and if you look at the way the, the market is, developing, on the issuer side as well, companies that need to raise, capital, again, they will be looking at public markets, they'll be looking at private markets.

They may come and have a [00:10:00] conversation with us. You know, what, what are we interested in, in doing? And, at a time when you've had, you know, multiple years of very strong performance in corporate credit, when you have had some deterioration in terms of underwriting standards, covenants. Et cetera.

For us, the option to be able to shape the deals that we want to do, make sure that the collateral is, is very strong. Make sure the covenants are, strong. One of the nice things about bond markets is complexity. I mean, if you are a, on the equity side, a company tends to have one, one stock, you know, maybe your American depository receipts, but, one stock.

Whereas on, on the fixed income side, a whole plethora of, issuers for, for, an institution. And we can, you know, we can benefit from complexity, complexity, risk premium [00:11:00] liquidity risk, premium. And then, you know, obviously, and, you know, S&P, no, no secret to an S&P audience, but get the underwriting right.

Get the credit analysis right. Get the compensation for, liquidity risk premiums right, but then. You know, there's gonna be, we think, you know, really good opportunities for us, in this environment. And, and again, a nice thing about PIMCO is when we, when we do find these good opportunities, we can be very selective, but we, we have the ability to do, you know, large sized, deals when, when the, the opportunity looks right.

Joe Cass:

Yeah. And you mentioned the meta, data transaction. Okay. So just for anyone who kind of maybe have, has heard of it but doesn't know kind of the, the details, why was it so significant and what was interesting about the deal for PIMCO?

Andrew Balls:

So the [00:12:00] size of the deal was, was very large. I'm not gonna say what it is in case I get it wrong, but it was high, high 20, 27 billion.

Yeah. So the, the size of the deal, was, was large. It was, it was quite a complicated, um. Structure. Without going to too, too much details on the precise, deal itself, but stepping back a little bit, if you're a, a corporate, issuer, why would you be interested in, a private credit deal? Well, I mean there's, again, there's a continuum.

You might do public credit, you might do private credit, depends on, the, the financing opportunity that the terms that are available to you. But you know, with data centers. You may want to do something asset backed. So this is an off balance sheet. Transaction. You may want to, agree upfront the, the terms, but then have, flexibility on the, the draw down in terms of the, [00:13:00] the timing of when you take the, the payments.

You may want to provide collateral, you may want to have, in the case of data services, data centers, service contracts, you may want to negotiate with a, a small number of lenders rather than, you know, the broad public market, regulatory and, disclosure type. Um. disclosure type considerations as well.

So I think, you know, for the borrowers and for the lenders, there's a lot of interesting development in terms of the, the market from our point of view, kind of direct lending, direct corporate lending to corporates is, is, is, is probably quite mature now. Asset backed. lending for us is, is very, interesting.

So it could be against various sorts of consumer, receivables. Consumers have strong balance sheets.

Joe Cass:

[00:14:00] Mm-hmm.

Andrew Balls:

We can certainly try and get access to the strong consumer balance sheets. It may be infrastructure data centers, it may be equipment, it may be airlines, aircraft, whatever it may be. When you have, lending against the collateral.

When you can on, on our side, when you can, be very careful in terms of the credit underwriting, the, the documents, at late stage in the, in the credit cycle. We, we, we will look to have a little bit less in terms of just generic credit exposure, but if we can find really. Deals, on our side, if we can be flexible, if we can move, quickly.

You know, this is, this is a very interesting opportunity and also, you know, it's nothing kind of new under the sun and we've been doing this for a very long time. You know, the terminology changes, but, you know, we've been doing this for 20 years, or, or, or, or, you know, longer than that [00:15:00] actually in terms of, private credit.

So, you know, good opportunities for us. And, important to think of the continuum public to, to private, credit. And, and the most important thing I think is, or one of the most important things, credit underwriting is very important, but make sure you're getting paid for liquidity risk. And, you know, at the moment.

We're PIMCO, we're, we're bond people. So, you won't be surprised that we have a positive outlook on, on fixed income, but, you can get 6-7% yield on very high quality, fixed income, funds with daily liquidity. So yeah, fine. It's fine to do private credit there. There's gonna be really good opportunities there for us as investors, for anyone as an investor.

But just make sure that you. Are getting sufficient compensation for giving up liquidity when the starting point in terms of high quality fixed income, [00:16:00] 6-7% type yields, looks, you know, very attractive to us. Equity like returns, or similar to equity like returns. Looking back at a historical, basis, but then forward looking, at the time when equity valuations look quite full.

You know, really, really good opportunity set in, in public, fixed income. So that's, you know, start with that and then make sure we're getting paid for additional risk or additional, liquidity risk. Premier on top of that.

Joe Cass:

And kind of sticking with the theme of AI, how are you using AI with PIMCO within the investment process?

Andrew Balls:

So, I think that the. With the investment process and more broadly at PIMCO. It's a productivity, tool. Some of my colleagues have have said something along the lines that, it [00:17:00] frees people up, to do less kind of mundane stuff and spend more time on, on high value added or higher value added, activities.

I'd say in terms of kind of direct alpha, generation. I, I wouldn't put huge weight on, on, on that at, at least at this stage. But, for our alpha, generators, it's, it's a tool, that, that, we use quite broadly. I think one of the, well credit, credit analysis, is, is, is certainly, an area where we use, AI, a tool for our credit analysts, you know, going through the, the reports, the conference calls, et cetera, being able to isolate topics, extract information, et cetera. I think on the important area for us, we, we do a lot of asset backed lending, a lot of real estate, mortgage, lending.

And it's, it's a. [00:18:00] It's a, it's a very useful tool in terms of the ability to, assess credit quality, extract information in terms of individual loan level, data. You know, you have masses of unstructured data and you can use AI tools, to, help you organize data. I think, on the private side of the business, I think this is.

We have tools that we use there again, organizing information, organizing data. The classic example would be in a deal room type of situation, rather than kind of having people stay up all night.

Joe Cass:

Yeah.

Andrew Balls:

Pouring through the, the documents, organize, information. Across different data sources in that kind of context.

There's sentiment type tools that we, we use. There's forecasting tools. There's forecasting tools. We've used for a long time, we used to call it different names, neural networks or whatever, whatever the, the term was back [00:19:00] then. But, there are forecasting tools as well. And then on the, with my client facing colleagues, there's all sorts of things that, they use now and in the future they'll be able to use in terms of.

Reporting to clients, organizing information. So I, I, I'd, I'd see it as a productivity tool. I'd see it as, as work in, progress. We have a lot of quantitative input, input into our investment process. We have really good quantitative team, so the quantitative, aspect is very important in terms of, um.

The investment process, process, alpha generation. I'd say that AI at this stage is more in terms of supporting our portfolio managers, our analysts, and you know, quite a broad range of, things.

Joe Cass:

And when you personally visit the clients of PIMCO, so the, the pension funds, sovereign wealth funds, insurance companies, what [00:20:00] are their priorities right now?

What are they kind of asking you about?

Andrew Balls:

Um. Well, it's hard to get away from, the discussion on the US administration. Mm-hmm. Because this has been very, impactful and, you know, for us as, as active managers, you know, it's been a very good environment. The last year was a really good, environment for, well, for PIMCO, but for, for, for active management, in general.

So I think you have a lot of focus on, I think the first point would be the, the US administration and the global IMP implications of the US administration. I think you have a lot to focus on fiscal and issuance, which we have, talked about, already. And then I think another discussion we have a lot, and we think it's an important discussion is kind of, the move from [00:21:00] cash into.

Core fixed income. If, you know, if you go back to the repricing in, 2022, this was an excellent, time to be in cash and a painful time to be in, bonds or equities, during, that period, you know. Interesting, unusual time inflation is the driver for both, fixed income, as well as for for equities.

But then subsequently, this has been, you know, a good envi, a very good environment for, for fixed income and, an environment where the, the return on cash is, is going down, giving central bank, easing. So I think a lot of the, a lot of focus as well. On, on the shift into core fixed income and the, the benefits of, of core fixed income in this, in this point of the, the cycle.

And then, you know, I took my own book. I think there's a lot of interest [00:22:00] in terms of global, fixed income, lots of interest in emerging markets, as well. And, and we see a lot of benefits in terms of, global diversification in a, you know, in a, in an uncertain. Environment when there's a really good global opportunity set.

So we have a lot of, discussions as well in terms of the, the benefits of, global, global, diversification, a lot of interest in in, in, in private credit, which we have, discussed. And, and again, a nice thing for PIMCO. A nice thing about working at PIMCO is, um. You spend your time, you have this global opportunity set.

There's all sorts of things that we can do. And, you spend your time thinking about risk adjusted returns, how to get the, the, the [00:23:00] best risk adjusted returns for our clients, you know, across the, the full, opportunity set across. Um. Government bonds, corporate bonds, emerging markets, asset backed securities, public, private, you know, that's, that's what you spend your, your time, focused on.

Joe Cass:

So your older brother, Ed went to Oxford and studied PPE, and you did the same Ed then went to Harvard for his masters, and you did the same. Ed went to the FT and you did the same Ed then went into politics, but you chose to move into PIMCO. So. Interested to know what was it about finance or investing that attracted you and was politics ever on your kind of roadmap?

Andrew Balls:

No, we did similar things. You, you could try and get scholarships. We both went to the same university. You could try and get the scholarships. So it was kind of a standard thing to try and get that, um. Scholarship, which allowed me to go to, to study [00:24:00] in the, the us. And then I spent a few, I spent, actually, I spent eight years at the FT, which was, which was great fun.

I worked with Martin Wolf, which was, excellent and, writing editorials leaders. And then I, I did Lex. The Lex column there,

Joe Cass:

of course, yeah.

Andrew Balls:

And I then I, I was in, I was in the US covering the Fed and the US economy, so that was great fun. I don't think I was ever particularly go into politics.

I think, you know, one member of the family was enough, and, but I was always interested in economics and markets policy. And, and so yeah, so I, I, I went and worked at, um. PIMCO. And so, I mean, I, I loved being the FT if you're interested in economics markets, macro, policy then, then being the US economics correspondent, the FT was, was was good fun.

And then when I moved to PIMCO, you know, [00:25:00] kind of half the job is similar. You're thinking about the, maybe not half, but you know, a good, a good portion of the job is similar and, and then you are, um. Thinking about how this relates to trades and, and markets, but, you know, a lot of the, lot of the topics when I started at PIMCO, I, I spent most of my time on Global Central Bank watching, which is pretty similar to what I was doing at the ft.

Joe Cass:

So when you, I mean, it's kind of an interesting move from the FT to PIMCO and not, maybe not kind of a tried and trusted, you know, people going from journalism into managing money an enormous investment manager. Did you, when you moved across, did you initially manage money or did, is that something that you took on later?

And also how did you manage to, how did you get the role at PIMCO? Was it an open interview or was it just connections?

Andrew Balls:

So I, so when I was at the FT I got to know people at PIMCO. Well, I got to know, Mohamed El-Arian very [00:26:00] well. Who, um subsequently was the, the chief executive at, PIMCO

Joe Cass:

and two, two time guest on Leaders, by the way.

Andrew Balls:

Oh, is it? Excellent. Good. Good. And he was Co-CIO and I got to know Paul McCulley.

Joe Cass:

Mm-hmm.

Andrew Balls:

Do you remember Paul?

Joe Cass:

Yeah, I remember Paul.

Andrew Balls:

Paul McCulley, very well. And so that was, that was my, introduction. And it's interesting. It would, I think it would be harder now when I joined PIMCO. US total return was, I dunno, two thirds of the business, probably more actually.

So we spent a lot of time focusing on the fed, the US economy. So when I joined, I wasn't sure, I would have much clue what was going on, but you know, the first day I was there, I was in the investment committee talking about the, the Fed. So that wasn't quite, you know, it was, um. Familiar, territory, and then I was meant to be our global swaps trader.

I think I'd have done a poor job, at that, but then [00:27:00] Lehman defaulted. So I, I, I didn't do that and I, I, I started off, I was a, I was a strategist, and a, focused on policy. And then I, I started managing, money, a couple of years after I, um. Joined initially in the US and then, and then I moved back to, to the UK.

Joe Cass:

And did you always have kind of an eye on managing money, or was it being in the role for a couple of years you thought, actually I could kind of give this a go. I think this would work out for me.

Andrew Balls:

So when I was at the FT I, you know, I, I was interested in markets, I was interested in, in, in policy economics.

I, I, I had a good idea. I probably wouldn't stay at the FT forever. I mean, most of my friends from their, you know. People moved on and did different things, but I, I didn't have a plan to manage, money. So I, you know, I did that and you, you, you know, you have an opportunity. You manage, small number of portfolios.

Do you do a good job? And if you [00:28:00] do a, a, a good job, then you do, more. And, you know, managing money is, is if you're competitive, if you have views. The nice thing is, you know, you get to keep score. 'cause every day you have your, your p and l. So, you know, we talk a lot. We, spend a lot of time analyzing, discussing issues at our investment committee, but ultimately the, you know, the p and l, shows on the trade or, you know, overall shows whether, whether you're getting things right or or wrong.

So if you're interested in these, topics and you'd like to keep score. It's a very good thing to do. And then, and then a nice thing about PIMCO, this goes back to, to Bill Gross, is the focus on Alpha and clients, you know, on, on the investment side. The investment process is about generating, returns for.

For clients. It always feels a bit exhausting the [00:29:00] first week of January. 'cause we had a, we had a very good year last year and now the clock resets and we, we have to start again, rowing the boat. But, but, the, you know, the culture of the firm is alpha generation and, having investment products, which makes sense for, for clients and, you know, so you get to.

You get to manage money on behalf of, you know, a very broad range of, clients across the world who, trust, you know, PIMCO with their money.

Joe Cass:

So be interested to know, you mentioned Mohamed El-Erian before. You're sitting inside kind of arguably one of the most influential bond houses in the world.

So what kind of lessons have you learned from working alongside these great investors? Or your colleagues at PIMCO?

Andrew Balls:

So Mohamed, I learned a lot about, macro [00:30:00] frameworks and, 2008 was, was, really interesting 'cause Mohamed had been at the IMF, had a lot of, experience from his IMF days of, you know, crisis.

Um. Management. So I, I learned a lot from him in that time. We had this investment committee and, Mohamed and Bill were, were were running it and the, the job was write down 30 policy interventions that you think may happen after Lehman Brothers defaulted. So, you know, I wrote down 25 and I was kind of laughing the last, you know, left half dozen.

But about. I don't know, most of them happened. And, you know, the world really changed there in terms of the, the government intervention, incredible range of interventions you saw in the US and then, globally. I learned a lot from, from Bill Gross and the, I mean, we've added to it and we've [00:31:00] improved it and we have, um. More of a quantitative focus, I'd say today, than we, than we perhaps had, at the time. But most of the investment framework that Bill Gross, developed, you know, starting, more than 50, years ago now. And I learned a lot from, bill. One interesting thing is if you're, um. If you're an investment manager, you need to think about the baseline and the risks around the, the baseline.

And then you compare this with market prices and you look for asymmetries. Whereas if you're a, a central banker, you have to do point forecasts, and you have to show your working, in a, in a different sort of way. So one thing I thought was really interesting in the run up to the, to Lehman Brothers is PIMCO had figured out.

The scale of the problem in financial markets and the risks, and we were too early, which often [00:32:00] happens, year or two, early. But when you talk to central banks about what was happening, they would say, we understand everything you're saying, but we can't model this. We can't forecast this. I mean, the, the classic thing is it's really hard to forecast a recession.

'cause, you know, it's, it's always a, surprise. Um. And as an investment manager, one, one thing I think I learned from, from Bill, was, thinking about not just the, the, the baseline, but the range of outcomes and then looking for the, the asymmetries. And if, in that case, if, if you figure out, as, as PIMCO did that you're gonna see massive easing cycle, um.

Across the world, you position for that?

Joe Cass:

Mm-hmm.

Andrew Balls:

And I can't remember where yields were. policy rates were 5-6%. If you think they're going down to one, then there's a massive [00:33:00] asymmetry 'cause they're probably not going up to 10. And then, be patient. You, you're not always gonna get the timing right.

Joe Cass:

So final few questions now, what is Andrew Balls in one of the most highly pressured role in global finance? Do to just relax and chill out.

 

Andrew Balls:

I play the drums.

 

Joe Cass:

Me too.

Andrew Balls:

Which do you?

Joe Cass:

Yeah,

Andrew Balls:

which is a nice scene to, I did that last night when I got home. So that's,

Joe Cass:

taking out any stress from.

Andrew Balls:

That's a good thing to do, like the first 20 minutes when you get, home.

I, what do I do? I spend a lot of time watching my son play, football. Which, which is, uh. Great fun, and I've, I've done that a lot over the years and then my. My family were Norwich City fans, probably a bit less fun, with second to bottom, the championship. But,

Joe Cass:

well all me and my family are all West Ham fans.

Andrew Balls:

Oh God.

Joe Cass:

So we're in the same [00:34:00] boat.

Andrew Balls:

No. Well that's, that's, that's tricky. As well. So we may be seeing you next season. Actually, we may not be seeing you next season.

Joe Cass:

Oh, there we go.

Andrew Balls:

But, but, so no, I go to a lot of, 10 of us went the other week. 10 of my family. We all went the other week. Um. As part of the Christmas holiday. So that was.

Joe Cass:

That's great.

Andrew Balls:

That was good fun. So,

Joe Cass:

any favourite books or podcasts right now?

Andrew Balls:

I like to read books on history. I like podcasts on history. I like, I like the, I do listen to the rest is history. I listen to that in the car with my, my family quite, often or if I'm cooking or something, I like, I like the, I was lucky enough to have, dinner a year or two ago with the, the host of, of rest of the rest of history, which was good fun.

Um. Football, history podcast books. I've never read them before, but I'm reading the Simon Sharma, books on,

Joe Cass:

yeah.

Andrew Balls:

British history at the moment. I'm halfway through the first one. I shouldn't say I'm reading them, but, 'cause there's, when I was at school, we, we, there's [00:35:00] certain things we just didn't study.

We did the First World War.

Joe Cass:

Mm-hmm.

Andrew Balls:

But we never really did. And there's whole bits of history. I, I don't know. So I'm filling in the, the gaps a little bit. There. So there we go. Drumming football. Um. what else? That's probably it, probably the most.

Joe Cass:

Well, Andrew Balls, thanks so much for joining me today.

Andrew Balls:

Nice to talk to you. Thanks for having me.