Pimco Chief Thinks Europe Will Be 'Fine' (and So Will Post-Gross Pimco)

Europe will be "fine" if Greece leaves the eurozone, according to Douglas Hodge, chief executive of Pacific Investment Management Co., one of the biggest bond fund managers in the world.

Mr. Hodge told a conference in London on Thursday that "the market is fairly sanguine about Grexit" because it has had three years to prepare. "Europe is large, it's stable," he said.

"If Greece leaves, will Europe be fine? Yes, I have every confidence that they will." He added, however, there is a risk that a Greek departure from the currency bloc could challenge Europe's political unity, not to mention the "extremely painful" consequences for Greece.

As to whether or not Greece will be forced out, Mr Hodge wisely ducked the question.

The Pimco chief has had a tumultuous year following the departure of the firm's star manager Bill Gross - and the billions that followed him out the door. But Mr. Hodge said the company had handled it all with "exceptional skill." "Gross is a legendary investor," he said. "[But] over the last 20 years, we have become much larger, far more diversified than just what Bill Gross was doing." And when Mr Gross left, "we were ready," he said.

Since then, Pimco has lost its status as the manager of the world's biggest bond fund; The title is now held by an index-tracker run by Vanguard Group. So why does he think investors are flocking into passive funds?

After the crisis, he said: "the industry had a trust deficit... That drives people into things like an indexed approach when they lose trust." But because returns over the coming years are going to be so lackluster, Mr Hodge now claims that it is becoming a better environment for a fightback from active managers. "We are now in conditions where ultimately active management can outperform."

So "why own bonds?" asked Mr. Hodge, pointing to record low interest rates. Mainly, he said, because equity markets are also at sky high valuations -- 27 times price-to-asset ratios for U.S. equities, compared to a long-run average of 16 times. "The last time we got to these values was pre-financial crisis and before that was the tech bubble," Mr. Hodge commented. Meanwhile, "The amount of debt has really not come down whatsoever [since 2008]."

So are equities overvalued or heading for a crash? Mr Hodge did not want to be so definitive: "I wouldn't go so far as to say over-valued," he said. Instead, they are being pushed up by central banks, who are temporarily depressing volatility.

As they taper, we will see more volatility, he predicted, but central banks should let it play out. And as an aside, Mr Hodge revealed that even Ben Bernanke, the former Federal Reserve chairman who now is an adviser to Pimco, refers to the market's last act of his central bank tenure, when he first introduced the word "taper" and send markets into meltdown, as "the taper tantrum."

As for regulators, the Pimco chief was unsurprisingly pleased by a statement given Wednesday by a committee of global regulators that funds do not deserve to be regulated like banks. He was most impressed, he said, by the fact that market regulators were asserting their authority to regulate markets, rather than letting central bankers bring in "dangerous" regulations for funds based on treating them like banks.

But for anyone feeling too cheerful, Mr Hodge also had a rather grim message on pensions: "The notion that we can still retire at the same age as our grandparents and yet we're living 15 years longer is somewhat absurd."

So, hopefully, you're enjoying your work.