Fixed-income specialist Western Asset Management is keen to see a rise in US interest rates, its chief executive told AsianInvestor.
But with rates on a downward path in Asia, he predicts that unconstrained products are set to attract most of the inflows in the fixed-income space.
And months after Pimco was thrown into turmoil with the departure of veteran CIO Bill Gross, Western’s chief admits that his firm has seen “significant” flows coming from the rival firm’s former customers.
On a recent visit to Hong Kong, Western CEO James Hirschmann said that in contrast to the prevailing consensus on the impact of rising US rates, he would welcome such a move.
“We’d love to see a rising rate environment, if it was in a controlled fashion – that would be great for our business,” Hirschmann said. “For us specifically, we have a large liquidity business where we’ve been waiving fees, so it would be nice to start earning some fees on those funds and products.”
He added that a huge spike in rates could be “problematic”, but he does not see that occurring.
The market consensus for some months has been that the US Federal Reserve will start to raise rates by mid-year. Last week, however, the Fed indicated that investors may have longer to wait for a rate increase.
“Everyone has this belief that if rates rise it will be bad for fixed income investors and fixed income managers,” Hirschmann added. “But really, when you think about the roll-down effect, a rising rate environment in a controlled fashion will not have that much of an effect on principal values.”
Asia-Pacific interest rates have taken a hit in recent months - since last year there has been a succession of interest rate cuts by Asian central banks, including China, Thailand, India, Korea and Australia. The cuts have been made in response to slowing growth, as central banks attempt to stimulate their economies.
As a result, Hirschmann identified a particular regional characteristic – a willingness to act fast to take advantage of opportunistic investments. He cites, for example, Australian and New Zealand debt, in part because of their relatively high yields.
“In some markets, like Japan, where they have very low levels of interest rates, they’re looking for anything with yield. As a result, if they can get a positive carry on the currency side it makes it a pretty appealing investment opportunity for them.” The NZ dollar in particular has been subject to much carry trade activity from Japan in recent years.
This is where unconstrained products come into play, Hirschmann explains, for which he has seen significant inflows since the global financial crisis. As of the end of March, Western has around $15 billion in its total unconstrained AUM.
“Investors are looking for yield, and the only place they can get yield right now is by taking some credit risk. So you have to get into the investment grade credit, high-yield, or emerging markets. The alternative is go into a total return kind of play.
“I think that is where a lot of the money is going to move to in the fixed income space. Firms that have the global platforms with investment resources around the globe, and those that can port investment ideas constantly, will be best positioned.”
Western has seen significant asset inflows from Asia since the global financial crisis, with the regional proportion of global AUM rising from 4.6% in 2007 to 12.5% today. This has been the result of the Asia AUM doubling alongside the overall global AUM shrinking. As of March 31, from a sourced and serviced perspective, Western had around $57 billion in Asia AUM, with Japan making up $42 billion of that. Western currently has a global AUM of $454.8 billion. Hirschmann said that in 2007, pre-financial crisis, Western’s Asia AUM was a mere $28 billion. In the first half of 2007, Western’s global AUM was around $600 billion.
Hirschmann is keen on China and India prospects, but does not foresee a rash of Western office openings.
“India is a better value play at the moment. We have been pretty positive on the China story, believing that they can engineer a soft landing. But given the level of rates, and the dynamics and structural changes from a value perspective, India is probably one of our favourite opportunities in the region at the moment.
“I don’t see any more [Asia offices] on the horizon,” he added. “We’ve talked over the years about doing something more explicit in China, but we haven’t done anything yet. We came close to setting up a rep office years ago but we didn’t move on that. I would think that would be the only place you could see us possibly do something beyond our current footprint.”
Hirschmann explains Western’s expansion strategy: “Some people have a ‘build it and they will come’ approach; we take the opposite tack which is ‘let them come and we will build it’.”
Sovereign wealth funds have been a key source of growth for Western in Asia – as of March 31, Western was managing $78.2 billion from sovereign investors, sovereign wealth funds, central banks and other official institutions. Hirschmann says this is the segment in Asia where Western has seen the most growth.
Events over the past 12 months at Pimco, the fixed income manager long seen as Western biggest rival – and with their headquarters not far away from each other in California – have done nothing to hurt Western’s prospects.
In September last year Bill Gross, Pimco’s chief operating officer and co-founder of the firm, announced his intention to leave the firm in order to run the total-return global bond strategy for Janus Capital.
That move has damaged Pimco’s AUM; in March this year alone, investors withdrew $7.3 billion from the firm’s Total Return Fund – the fund which Gross managed until his departure. The fund had AUM of $117.4 billion at the end of March, a 60% drop from a peak of $292.9 billion in April 2013.
Hirschmann admitted that flows into Western from Pimco customers have been “significant”.
“We’ve seen some flows, absolutely. The first money that moved was the fund assets and the assets that were managed explicitly by Bill Gross out of the total return, unconstrained and a limited duration book of business. We’re beginning to see some institutional money move and we’ve participated in that along with a number of other fixed income firms. The flows have been significant and I think it will play out over a fairly long period of time.”