Pimco, the California-based specialist bond manager, is a well known success story in Asia, particularly in Japan, where demand for global fixed income helped it quickly amass $45 billion of assets under management, of which $18 billion is from the retail funds market.

But conditions are increasingly difficult for bond managers, as investors throughout the region seek more risk. ôItÆs getting harder to fight for our share of wallet,ö says Douglas Hodge, Tokyo-based managing director for the firmÆs Asia-Pacific business. ôOur growth in gathering assets under management is slowing. This is not going to be an amazing growth year, not in this period of reflation. But this business runs in cycles.ö

The firmÆs rate of growth hit full stride in 2002-03, when Japanese investors were pouring into global sovereign-bond funds as a refuge against zero interest rates and a bombed out domestic equity market.

Pimco has kept pace with changing investment demand, offering higher-risk asset classes such as credit, emerging-market debt, high yield and non-US dollar exposures even as investors have begun to withdraw from sovereign bond funds. In November 2006, it sub-advised the international bond portion of a balanced fund of funds launched by Nikko Cordial, tapping the new trend in Japan for multi-asset products. (Capital International and JPMorgan Asset Management were the other managers, handling equities.)

Nonetheless, the equation for fixed-income managers is getting harder, as investors demand returns when bond markets struggle to offer yield. ôWorldwide returns from bonds have been low, due to stable and low inflation, and therefore stable and low yields,ö Hodge says. ôRisk premiums, however you measure them û in spreads, yield curves, volatility û have remained compressed.ö

And while the firmÆs house view calls for a æsoftÆ landing of the US economy, which in theory will put pressure on risk assets such as commodities, Hodge says in Asia there is so much liquidity that it may take time for events in the US to impact the regionÆs markets.

In some Asian markets, depositors can still get 5% for cash, more than the typical yield of 4.5% from a bond fund. ôYield curves have been inverted for a year now, which makes it harder to disprove the notion that cash is better than bonds,ö Hodge notes. And regional equities have been strong performers of late.

Low volatility tends to compress the dispersion of returns among active managers, so it is more of a challenge for firms such as Pimco to rely only on performance to distinguish themselves from rivals such as BlackRock, Goldman Sachs Asset Management and Western Asset Management (Wamco).

HodgeÆs response is, first, a series of back-to-basic measures, which he acknowledges are shared by his competitors. Relationship management becomes ever-more important, so that providers make sure they understand what clients are going through, in order to develop creative solutions. Just generating the usual few hundred basis points of alpha may not be enough.

His second measure is an extension: creative product design when the traditional suite doesnÆt cut it. Thirdly, be an opinion leader. One current topic is liability-driven investment (LDI), which introduces transparency and accountability to pensions. LDI has become a massive trend in the United Kingdom and elsewhere but largely because of regulatory initiatives, which are lacking in Japan or other Asian jurisdictions.

On the specifics, however, Hodge keeps his cards to his chest. The firm has done more in the structured products space, including using some leverage, but he declines to go into details.

One area he highlights, however, is the growing universe of Asian fixed income, particularly in local currencies. He notes that the continued compression of risk premiums on spreads in Western countries and Japan has enhanced the attraction of Asia ex-Japan bonds, not just for investors from Tokyo or New York, but also now for investors from within the region.

The Asian Bond Fund initiative by the regionÆs central banks is beginning to lure local financial institutions such as insurance companies into the bond markets, while more companies are experimenting with raising capital via bonds rather than just through bank loans.

Pimco established a local currency trading capability in Singapore in 2005, and now runs both bond and currency strategies from that office.

ôItÆs not a high-growth business û itÆs not quite there yet,ö Hodge says. ôBut demand is growing because beta returns in the US and Europe remain so low.ö

He believes the markets still need further liberalisation to cohere into a meaningful asset class. The biggest bond markets in Asia outside of Japan are in China, India and South Korea. The Chinese and Indian markets are closed to foreign investors because of capital controls; the Koreans maintain some controls as well. But Hodge notes that last year IndiaÆs prime minister, Manmohan Singh, indicated his desire to introduce full convertibility to the rupee. Although the initiative remains mired in domestic political battles, it is likely that more opportunities for global fund managers will emerge.

Hodge, who has run PimcoÆs Asia-Pacific business for seven years, first from California before moving to Tokyo five years ago, notes that a time will come when fixed income will be back in demand. He says the inversion of yield curves in the US suggest that day may come soon. In the meantime, Pimco and its competitors will have to find innovative ways to consolidate their remarkable growth in the region.