A timely review of the product offering, which is always important in meeting client needs and adapting to changing market conditions, is an indispensable exercise for both asset managers and distributors in a new world order generated by the financial crisis. It will undoubtedly emphasise the difference between the trail blazers and the laggards.
Last year, Pimco’s annual secular forum coined the expression “new normal” to address the post-crisis environment. Pimco argued the crisis had been so systemic and severe, and required such an unorthodox response, especially from governments, having shaken the very core society and the financial system, that it was unlikely the world would return to how it had been prior to 2007.
Mohamed El-Erian, Pimco’s CEO, stated last year that the world is “on a very bumpy journey to a fairly stable destination”. This year Mr El-Erian’s report Driving without a spare confirmed the world is on a journey, but the destination may not be as certain, having to negotiate through unfamiliar territory, and having already used its spare tyres.
Humankind is heading into a world that is re-regulated, de-levered, and growing less rapidly in the industrial countries “where concerns about the dark side of globalisation temper enthusiasm for its net benefits, and in which politics matter for markets and the economy,” according to Mr El-Erian.
In addition to offering investment solutions in those sectors which experienced extreme volatility or pricing anomalies through the crisis, such as investment grade credit, allowing investors to exploit the “bumpy journey part of the story,” the firm launched three main products to address the world’s uncertainties, including a multi-asset strategy, using fixed income, commodities and equities.
Different factors
The underlying principle of the strategy, which, since its launch last year, has gathered $1.3bn (€1.05bn) in Europe, mainly sourced from family offices, banks and distributors, aims to challenge the traditional way of thinking about asset allocation.
“You need to be forward looking, you need to look at the underlying risk factors that make up each of those asset classes, and be proactive about some of the extreme outcomes or tail risks,” explains Michael Thompson, head of European remarketing at Pimco. “You need to be prepared to spend a very small portion of the portfolio on hedging against potential tail risks, very early on, even if there is a very low likelihood that the risk might occur.”
Another product, launched early last year, the Global Advantage Strategy Bond Fund was designed to address one of the key features of the “new normal”: the increasingly larger amounts of debt issued by governments and investors’ growing discomfort in the cap weighted approach to index construction, where the largest issuers of debt have the largest allocation.
“The idea is to move from cap weighted to income weighted, based on a concern that government balance sheets are massively levered,” says Mr Thompson.
The fund, which may invest in a broad range of fixed-income instruments, includes the recently launched Pimco Global Advantage Bond Index as one of its benchmarks, now administered externally, which employs a weighting system based on gross domestic product and is designed to avoid allocating too heavily toward overpriced securities and heavily indebted issuers.
Also, the recognition that a large number of investors have lost faith in benchmarks and want to access the best ideas available on a relative value basis within fixed income led the firm to launch its first publicly available absolute return strategy in early 2008, which aims at delivering returns of about 300 to 400 basis points over Libor. Unlike all the other Pimco’s Ucits III Dublin-domiciled Global Investors Series of funds, which are relative return based strategies, the fund can invest in any sector of the bond market and is very flexible.
The crisis has made the role that exchange traded funds (ETFs) and alpha strategies play in clients’ portfolios even clearer, says Christophe Girondel, head of global fund distribution at Nordea Investment Funds. “There is a very strong polarisation today between beta and alpha, while before the financial crisis it was a more blurred environment. ETFs play beta and are more tactical plays, while alpha strategies are long term conviction investments,” he says.
On that basis, the Nordic bank continues to implement its multi-boutique strategy, launched four years ago, with the appointment of sub-advisers which can generate alpha in asset classes where in-house expertise is not sufficiently developed.
Over the past two to three years Nordea has been focusing on broadening its geographical areas coverage, launching US high yield equities managed by MacKay Shields and a number of funds in the emerging markets area, such as the Far Eastern equities managed by Tokio Marine, LatAm equities managed by Itaů Asset Management and African equities managed by Standard Bank’s Stanlib in South Africa.
