Pimco is strategically hiring portfolio managers with active equity experience and is busy building a product to meet growing international demand for Asian bonds.
To date the firm has focused on hiring in New York and London, but Brian Baker, CEO and director of Pimco Asia, foresees that equity investment specialists will be placed in Asia at some point.
Pimco added active equity investing to its range of services in March this year. It has a global equity product and is in the process of developing an emerging market equity product.
“The focus of our active equity product development will be in areas we think investors need to look at in the ‘new normal’,” he explains. “Our focus is going to be more on global equity markets and emerging equity markets, and less so on the US market.”
According to Baker, Pimco Asia manages over $30 billion in assets for more than 100 clients in the region out of a global AUM total of $1.1 trillion. Outside of fixed income, it has a complex of global macro-focused hedge funds, and invests in real estate and distressed private equity opportunities. It also invests in both passively and actively managed exchange-traded funds (ETFs).
Baker says the group manages over $15 billion in enhanced equity products – or passive exposure to an equity index through derivatives – but opted to move into active equities in response to client requests.
Pimco Asia also sees increasing demand both regionally and globally for exposure to Asian bond markets and Baker confirms it is looking to establish a product to meet this demand. “We continue to see greater interest in Asian local currency bonds globally,” he says.
“If you look at the historical allocation of a pension plan in the US, they have had roughly 3-5% of their exposure to emerging markets. That is significantly underweight relative to the emerging markets contribution to GDP. So we think that will be reweighted.”
Baker is anticipating rapid development of Asia’s local bond markets as countries come to the realisation that they need to develop domestic demand. This will lead to wealth creation, which will require better means for savers to invest their wealth.
“I think because of regulatory uncertainty overseas, more and more companies will want to raise capital locally, and if your expansion is going to be geared towards the domestic market, you would be borrowing in local currency to build factories, buy equipment for domestic production,” he notes.
Lack of liquidity and access to individual markets are two challenges that Pimco Asia faces. Baker notes that the firm is discussing the benefits of applying for a qualified foreign institutional investor (QFII) licence for China, but that no timeframe has been established on a decision.
The market for local currency bonds in Asia ex-Japan has grown from $68 billion in 2004 from 878 issues to $273 billion via 1,562 issues in 2009, according to data provider Dealogic. Already in 2010 local currency bonds have raised $263 billion via 1,954 issues.
China’s tally has risen from 17 issues in 2004 worth $13.1 billion to 284 issues worth over $159 billion in 2009. Already in 2010 China has seen 280 local currency bond issues worth a total of $159.3 billion.
China made up 1.93% of the Asia ex-Japan total in issuance in 2004 and 19% in value. By the end of last year the percentages stood at 18% for issuance and 58% for value.
Pimco Asia is the regional business of Pimco Group, one of the largest bond managers in the world which was widely credited for foreseeing the US housing crisis. It positioned for a steepening yield curve and focused on high-quality credit on the understanding that investment grade corporate bonds and non-agency mortgages would thrive in a slowing economy.
Pimco’s total return mutual fund domiciled in the US, its flagship product, returned 14.35% before fees in 2009.