Investors find refuge in Pimco’s fund fortress

The investment manager has expanded well beyond its fixed-income heritage since the crisis, with investors benefiting from the change.

Pimco has grown over much of its four decades on its reputation as a fixed-income fortress, and its flagship product under founder Bill Gross became the world’s largest bond fund.

Fixed-income assets still constitute 89% of the $1.2trn total funds it runs. But Pimco, part of Allianz, also expanded its ‘fortress’ into commodities, equities, tail risk, real assets and asset allocation capabilities, as well as ETFs and hedge funds. This year, investors seem to have ­appreciated the extensions.

Emanuele Ravano, a managing director in the London office and head of the financial institutions channel in Europe, explains: “About 80% of inflows in 2011 have gone into funds that either did not exist at Pimco before the financial crisis, or comprised less than 5% of our net flows back then.”

Critics who argue the fund industry launches too many products may not appreciate just how far investor appetite has changed as a result of the recent crises, and in ways that Ravano says are long term.

Meeting client interests

Clients are being largely driven by two prevailing themes. First is a move from regionally focused ­investments to global ones. Second is a preference for asset allocation products, where discretionary fund ­managers enjoy the flexibility to switch between asset classes as appropriate. Some 80% of net subscriptions to Pimco this year went into such products.

They can steer clear of an equal 33% static allocation between investment grade, high yield and emerging markets (EM) – or external debt, local debt and EM equities within EM funds – typical of some diversified credit funds.

Pimco has run flexible allocation products in-house for three years. It spans various asset classes globally and is launching a multi-asset product in EMs externally.

The company also elegantly breaks down the asset class ­exposure of its allocation funds on their fact sheets by factor ­exposure: to phenomena such as equity and bond exposure, mortgage and corporate spread exposure, and commodities.

Ravano says: “With a risk factor approach, you get a more complete view, so when correlations go up you get a much better view of the overall risk. That gives us a framework that was quite different from the norm.”

He says investors generally feel less comfortable, or indeed able, to manage their own asset allocation since the crisis: “There are so many variables difficult to manage such as currency, liquidity and the underlying markets.

“Pimco will add asset allocation products only in asset classes where we think we can add alpha over an entire cycle. We think EMs work for excess return over indices, [as do] deep-value equities. Combine these two parts of Pimco and we think you can provide a pretty competitive asset allocation product.”

These products will compete for attention with other providers’ funds of funds, which also reallocate flexibly, but do not invest directly.

“There are some very good funds of funds, but it is a difficult job to keep up with funds and managers, and it is so multi-dimensional,” Ravano says. But by investing directly in markets Pimco’s managers remain closer to those ­markets, and also can shift between them more rapidly.

He adds: “For example, our Diversified Income credit fund run by Eve Tournier in Newport Beach invests across multiple asset classes. She looks to what offers more reward for the risk taken: maybe she can match the reward of high yield with lower risk, for example, or go to bank debt or emerging markets. The decisions are more easily made at the level of the manager. She sees the latest bank and government bonds, as well as EM issues.”


David Walker

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