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By Fion Li - Feb 15, 2012 1:46 PM GMT+0800
Article from Bloomberg
Moderating inflationary pressures and growth-focused policies in Asia will support the region’s government bonds, according to Western Asset Management Co.
“The rate-hike cycle appears to have come to an end for most Asian countries, and a shift to accommodative monetary policies in the near term will provide upside potential to government bonds,” Chia-Liang Lian, the Singapore-based head of investment management for Asia excluding Japan at Western Asset, said in a press release sent to Bloomberg today. Western Asset, which manages $443 billion of assets globally, is part of Baltimore-based Legg Mason Inc.
Asian policy makers are in a “very favorable position” to employ expansionary measures as their governments have strong balance sheets, while slower global growth will lead to reduced inflationary pressure, Lian said.
India’s inflation rate, the highest in Asia’s 10 largest economies, dropped to a two-year low of 6.55 percent in January, official data show. Consumer prices in South Korea (KOCPIYOY) and the Philippines increased at the slowest pace in a year, while Indonesia (IDCPIY)’s recorded the smallest gain since March 2010.
China’s inflation rate could slip below 4 percent for the first time in 17 months in February and the full-year rate will see a “clear deceleration” from 2011, Zhou Wangjun, vice director of the pricing department at the National Development and Reform Commission, said in a Feb. 13 webcast with the official Xinhua News Agency.
Among Asian currencies, Western Asset favors South Korea’s won, the Singapore dollar, Malaysia’s ringgit, Indonesia’s rupiah, China’s yuan and the Philippine peso, Lian said.
Lian, who previously worked as an economist at the Monetary Authority of Singapore, joined Western Asset last year from Pacific Investment Management Co.
To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
FEBRUARY 11, 2012
Article from The Wall Street Journal
By BEN LEVISOHN
Many investors, looking for better returns and a little safety, are loading up on corporate bonds, which have been far steadier than stocks during the market storms of the past few years.
But corporate bonds are getting less safe by the day.
A change in the way corporate bonds are traded is resulting in murkier prices, more volatility and less differentiation among individual bonds. The result: Experts say investors should expect more risk and potentially less return from such bonds in the future, and rethink how they assemble their entire bond portfolios.
The good news? Once investors understand how the corporate-bond market is changing, they can make educated decisions about which kinds of investments—mutual funds, exchange-traded funds or individual bonds—make the most sense, given their investing goals.
"The changes will ultimately hurt the small investor," says Howard Simons, strategist at Bianco Research. "The only thing you can do is be aware of how risk has shifted and act accordingly."
It is easy to be complacent about an investment when it is surging. A broad rally in Treasury securities is pushing up prices of all manner of other bonds. After a strong 2011, relatively safe corporate bonds rated "investment grade" by the bond-rating firms have returned 1.9% this year—their best annual start since 2001. Riskier high-yield, or "junk," bonds have returned 4.1%. This, after three decades of steadily rising bond prices—among the longest bull markets for bonds in history.
Since the Federal Reserve's announcement late last month that it expects to keep interest rates low through 2014, investors have stepped up their buying even more. During the week ended Feb. 1, investors poured $7.5 billion into bond mutual funds, the most since data firm EPFR Global began tracking such investments in 2002.
Most advisers recommend that investors hold a broad mix of Treasurys and corporate bonds. But while the Treasury market continues to be the biggest and deepest investment market in the world, corporate bonds are becoming less predictable, even for the pros.
Banks Step Back
At the heart of the shift is the declining role of banks, which historically have been big corporate bond dealers, keeping vast reserves of bonds on their books and matching buyers and sellers. Experts say new regulations, including the Dodd-Frank Act, the so-called Volcker rule, which bans banks from trading for their own account, and Basel III, which governs banks internationally, have forced banks to be more selective about what they hold.
All told, banks hold about $45 billion in corporate bonds with maturities over one year, versus about $215 billion at the beginning of 2008, according to Barclays Capital.
Mutual funds, exchange-traded funds and other investors are filling the void. Investment-grade and high-yield corporate-bond funds have doubled in size since the beginning of 2008, to $1.2 trillion and almost $250 billion, respectively, according to Barclays. In the $1 trillion high-yield bond market, ETFs now account for about 3% of the market, up from virtually nothing four years ago.
As the steadying influence of banks wanes, the bond market is more vulnerable to swings in investor sentiment, experts say.
Prices today are being driven more by the whims of investors buying and selling funds and ETFs and less by the fundamentals of the bonds themselves, says Mr. Simons of Bianco Research. Investment-grade bonds have seen their volatility nearly triple during the past three years, compared with the three years before the financial crisis, according to Barclays Capital. High-yield bonds are more than twice as volatile.
The result is bigger opportunities for gains when the market goes up—but a bigger chance of losses when the market tanks, says David Sherman, principal at Cohanzick Management and portfolio manager of the RiverPark Short-Term High-Yield fund.
Murkier Prices
Making matters trickier for investors, bond prices are artificially high because of the Fed's recent rounds of Treasury purchases, which have pushed up the prices of most other bonds as investors seek higher yields. That makes traditional investment gauges less useful.
Consider the debate about whether junk bonds are a good investment now. One way managers value bonds is to look at the difference between their yields and those of Treasurys. When the gap is wider than the historical average, many managers say corporate bonds represent a good value. That seems to be the case now: The "spread" between high-yield corporate bonds and Treasurys is about 6.4 percentage points, above the 15-year average of 6.
Not so fast, others say. Because Treasury rates are artificially low, it is better to use the actual yield of the high-yield bond index, which currently is 7.3%, far below the 15-year average of 10%.
On that basis, the skeptics say, the bond yields aren't enough to compensate investors for the risks they are taking.
If you aren't sure you can value a bond, "you don't want to get involved," says Stephen Antczak, head of U.S. credit strategy at Citigroup.
Trouble for Funds
The changes in the market are forcing mutual-fund managers to rethink their strategies in ways that could dent returns and increase risk for investors.
Funds are required to allow shareholders to buy new shares or withdraw all of their cash every trading day. But the increased volatility is forcing managers to be more careful with their portfolios.
"Investors pulling out a lot of money in a hurry can upend an investment strategy and force you to sell things you don't necessarily want to sell," says Eric Jacobson, director of fixed-income research at Morningstar.
Many managers are choosing to hold more "liquid" bonds, which can be sold at a moment's notice. Bob Brown, president of the bond group at Fidelity Investments, says the firm now looks only for highly liquid securities. Eaton Vance has reduced the amount of hard-to-sell securities it owns in its portfolios.
The problem is that liquid bonds typically are more volatile than illiquid ones because they trade more frequently. The Barclays Very Liquid High Yield Bond Index is 25% more volatile than the Barclays High-Yield Bond index, which contains a mixture of liquid and less-liquid securities.
The price for liquidity, in other words, is more violent swings.
Some managers are boosting their cash holdings, which can reduce returns, so that they will have enough money on hand to meet redemptions quickly if the market drops and investors start selling. The Eaton Vance Income Fund of Boston, for example, now holds about 5% to 6% of its portfolio in cash, versus 2% before the financial crisis.
"Do you hold more cash, more liquid bonds or some balance of those two?" asks Jeff Meli, a strategist at Barclays Capital.
Playing the Market
So what is an individual investor to do?
Experts say people who can afford to do so should stick with individual bonds. Typically corporate bonds have a face value of $1,000, but investors should plan on buying blocks of at least $20,000 to avoid getting hit hard by commissions. Advisers generally recommend investors buy bonds from at least 20 different issuers, for diversification.
Since most investors buy bonds for income and plan to hold them to maturity, they don't have to worry as much about the market's volatility or increased correlation. They also can buy cheaper illiquid bonds that fund managers avoid.
There are downsides, however. Institutions tend to get better prices for big blocks of bonds than small investors can get for smaller blocks. Investors should check the Financial Industry Regulatory Authority's Trade Reporting and Compliance Engine website, known as Trace, to find recent prices. And these days, getting your hands on bonds with decent yields isn't easy, because investors are holding on to them rather than selling them for profit, says Marilyn Cohen, president of Envision Capital Management in Los Angeles.
Experts suggest investors look for companies with good cash flows and improving profitability. Ms. Cohen recommends three that she says fit the bill: a high-yield bond issued by auto-parts maker American Axle that matures in 2017 and has a 6.33% yield. She also likes a high-yield issue by energy-company Chesapeake Energy maturing in 2020 with a 6.38% yield, and an investment-grade bond from auto-parts maker BorgWarner that matures in 2020 and yields 3.51%. (Investment-grade bonds carry ratings of triple-B or higher from Standard & Poor's and Fitch Ratings and Baa or higher from Moody's; high-yield bonds have lower ratings.)
Fund Choices
Many investors can't afford individual bonds or don't have access to them in 401(k) accounts. For them, funds and ETFs are the only alternative.
They, like professional fund managers, must decide whether to look for more liquidity or less, and more cash or less.
Such investors should think about what they are trying to achieve with their bond holdings. For instance, an investor who wants exposure to the entire asset class should choose a fund or ETF with a low expense ratio and little cash, says Warren Ward of financial-advisory firm Warren Ward Associates.
"We choose from the lowest-cost funds available," he says. "And we prefer to make the cash decision ourselves."
Michael Gibney, an adviser at Highland Financial Advisors in Riverdale, N.J., recommends holding a large fund like the $16.2 billion Vanguard Intermediate-Term Investment Grade fund, a portfolio of 1,218 bonds that carries an expense ratio of 0.22%.
Sarah Bush, a senior fund analyst at Morningstar, suggests the $15.6 billion Vanguard High-Yield Corporate fund, which has an expense ratio of 0.25% and has just 1.6% in cash.
Other options include the $18.7 billion iBoxx Investment-Grade Corporate Bond ETF, which has an expense ratio of 0.15%, and the $13.4 billion iShares iBoxx High-Yield Corporate Bond ETF, which charges 0.5% in fees.
Sam Katzman, chief investment officer at Constellation Wealth Advisors in New York, prefers "go-anywhere" funds that have wider latitude in the types of bonds they buy and the amount of cash they hold. Such funds are for investors who prefer their manager make decisions about whether they think the bond market looks rich or cheap and act accordingly.
Mr. Katzman likes the $60 billion Templeton Global Bond fund, which owns international bonds and currencies as well as U.S. corporate bonds, and has an expense ratio of 0.88%.
Not everyone thinks cash is bad. Gregory Lavine, an adviser at Altfest Personal Wealth Management in New York, says he isn't concerned by managers holding some when better opportunities are unavailable. One of his choices: the Loomis Sayles Bond fund, which has about 11% in cash and an expense ratio of 0.63%.
Cash doesn't have to subtract too much from performance. The ING Pimco High-Yield Portfolio has an 8.7% cash stake, well above the category average of 5.9%, yet has been in the top 25% of high yield funds during the past one and three years, according to Morningstar.
Says Mr. Lavine: "It's better to hold cash than invest poorly."
By Jennifer Ablan and Matthew Goldstein
NEWPORT BEACH, California | Thu Feb 9, 2012 2:17pm EST
Article from Reuters
(Reuters) - He is the man who made bond investing sort of sexy - and now he may pay the price.
Over more than three decades, Bill Gross, co-founder of asset-management giant PIMCO, has made so much money for clients that he has become the barometer by which other bond traders are judged. His West Coast perch, prescient calls on the U.S. economy and devotion to yoga only added to the mystique.
But the very recipe that enabled Gross to dominate his industry may now be conspiring against him.
He's coming off his worst year in the business after making a huge bet against U.S. Treasuries that backfired. Last year, for the first time in nearly two decades, investors pulled more money out of PIMCO's flagship fund than they put in.
More troubling, U.S. regulators are now considering whether PIMCO should be deemed a "systemically important financial institution" - that is, too big to fail, and thus subject to tighter regulatory oversight. The concern: The juggernaut manages so much money for pension funds that it could hammer the economy if it ever went under. The firm has doubled in size to $1.36 trillion in assets since the collapse of Lehman Brothers in 2008.
The firm is lobbying hard to fend off the "systemically important" designation, according to regulatory disclosures. Like other financial firms, it also objects to impending rules that could make some of its derivatives trading more costly.
Industry analysts also wonder whether PIMCO's $250 billion Total Return Fund, the world's largest bond fund, is such a behemoth that Gross sometimes has to swing for the fences to generate the kind of returns investors have come to expect. Because PIMCO's flagship fund relies heavily on derivatives to bet on bonds, some analysts say it's unnecessarily complex and potentially at risk should one of its trading parties fail.
GROSSLY LARGE
Gross dismisses concerns about PIMCO's girth. He says the firm isn't "levered," or making bets with borrowed money, in the way that failed players like Bear Stearns or Lehman Brothers did. The asset manager is using only client money to trade.
"It's not like we are a deposit institution and there'd necessarily be a run on the bank because they thought the bank was going to fail," Gross said in an interview. "'Too big to fail' is dependent upon tens of thousands of clients" abandoning ship at once, and it's "hard to believe they'd want out at the same time."
The debate over PIMCO's centrality to the financial establishment is a turnabout: Up until the financial crisis, the 67-year-old Gross was largely seen on Wall Street as a West Coast outsider and a bit of a loner.
He holed up most of the time at Pacific Investment Management Company's headquarters in Newport Beach, California, which in September celebrated its 40th anniversary. Gross was a bond geek with a California twist - there was the yoga thing, and weekly TV appearances on business shows where he predicted the movements of bonds and the economy.
But during the crisis, scared investors piled into his funds. Policymakers from the Federal Reserve and Treasury Department turned to PIMCO to help with a raft of programs meant to rescue the financial system. That helped forge closer ties between the firm and the government and raised PIMCO's profile even more with investors.
"The concentration of bond-market assets in a few firms, which some could argue to be systematically risky, is not of those firms' design, but rather stems from their success," says Joshua Rosner, managing director of Graham Fisher & Co., an adviser to institutional investors.
LIFE AFTER GROSS?
Also bubbling up at PIMCO is a topic that few there want to discuss: Life after Bill. It's a quandary that has faced other legendary money managers who have built a firm from the ground up but must eventually find a way to let someone else steer the ship.
Some say PIMCO will be a much different place once Mohamed El-Erian, the firm's co-chief investment officer, succeeds Gross, as most expect he eventually will. Some former PIMCO traders say the firm will lose some of its edge without Gross, given that El-Erian, a former International Monetary Fund official, is more prone to wonkish discussion than hardball trading.
"If Mohamed took over, it would be the IMF and a lot of think-tank mentality," says John Brynjolfsson, who was PIMCO's lead expert on commodities and inflation-linked bonds before founding a hedge fund, Armored Wolf, three years ago.
El-Erian dismisses thoughts that PIMCO is becoming staid. Gross is responding to the firm's bigger scale by diversifying away from simply bonds and into stock funds, hedge funds and exchange-traded funds. Gross is in no hurry to leave, he adds.
"Bill's not going anywhere," says El-Erian, 53, in an interview at PIMCO's offices. "I often joke that he will outlast me. I would be considerably worse off, in every single way, if Bill wasn't here." (El-Erian writes a monthly column for Reuters.)
All these challenges come as many in the investing world question how much value money managers really add. Some of the best-known investors, including hedge-fund legend John Paulson, had poor returns in 2011, spurring talk that it's getting harder for stars to generate "alpha," or outsize returns.
There is now a slew of low-cost index funds and exchange-traded funds that often deliver performance superior to managed funds. To some degree, Gross himself is bending to the new reality. On March 1, PIMCO is launching an exchange-traded fund that seeks to offer a cheaper alternative to buying shares in the Total Return Fund.
A REALLY SHREWD CALL
Gross cemented his reputation as the Bond King with his famous prediction in 2005 that the subprime mortgage crisis would imperil all financial markets and major economies.
His call about subprime helped rocket his Total Return Fund to new heights. In 2007, the fund returned over 9 percent, ranking him No. 1 in his peer category. Equally important, the fund returned 4.82 percent in 2008 while most of its competitors' funds were down an average of 4.69 percent at the height of the financial crisis, according to Morningstar. In 2008 and 2009 alone, the Total Return Fund attracted over $65 billion in net inflows as investors fled falling equity and real-estate markets.
The 2007-2009 period may be remembered as Gross's peak. It's also when Gross, a man who doesn't like to travel much or schmooze with peers, began to shift from outsider to establishment figure, as a trusted advisor to federal policymakers.
Around the time Lehman Brothers collapsed in September 2008, Gross wrote in an email that PIMCO was "in crisis management mode with frequent contacts with Treasury and Fed" officials, and that he was working 18-hour days and getting little sleep.
PIMCO and rival money manager BlackRock Inc were soon tapped to manage several critical financial rescue programs. PIMCO was the lead asset manager of the Fed's $738 billion program to bolster the commercial paper market by snapping up notes from corporations, providing them with short-term financing. PIMCO is a unit of Allianz SE, the German insurer, which bought the firm in 2000.
POWERFUL PEOPLE
Gross brought in former Fed chairman Alan Greenspan as a consultant in 2007. Also gracing PIMCO's ranks are former top advisors to the Bush administration: Joshua Bolten, a former White House chief of staff, Richard Clarida, assistant secretary of Treasury, and Neel Kashkari, who ran the Wall Street bailout program better known as TARP.
Currently, Stephen Rodosky, a top portfolio manager at PIMCO, sits on the 13-member Treasury Borrowing Advisory Committee, an important adviser to the government.
PIMCO even came close to getting one of its own on the Federal Reserve. President Obama in 2010 considered Paul McCulley, a portfolio manager and the firm's defacto Fed watcher, for a Fed governorship. But McCulley didn't make the final cut. He left PIMCO in December 2010 and is now a director of the Global Interdependence Center public policy group.
Gross bristles at talk among some competitors, financial columnists and bloggers that PIMCO is too close to U.S. monetary policy makers. He says the firm doesn't get special treatment. In fact, Gross says, the first time he met Treasury Secretary Timothy Geithner "or any of them" in person was October 2010.
"It's just a suspicion" to characterize PIMCO as being cozy with the government, he added.
The PIMCO subsidiary operations that were helping the Treasury and the Fed buy mortgages and run their commercial paper programs were completely detached from the firm, he added in an interview. "They were in a separate building, and when Mohamed and I wanted to wish (traders) a Merry Christmas, we needed two lawyers and a special key to get in the door," Gross said.
HOUSE OF GROSS
PIMCO still radiates Gross's workaholic culture.
On a recent visit to PIMCO's headquarters, the trading floor was graveyard quiet. People who have worked for PIMCO say Gross prefers traders to swap electronic messages rather than speak - believing too much talk is a distraction.
It's not uncommon for PIMCO traders and portfolio managers, who start work at 4 a.m. Pacific time, to find a sheet of paper with their bond holdings circled by Gross himself, asking them to justify their trades.
Gross's temper has been known to flare at work, where he has slammed desk drawers in anger. He discourages employees from socializing and speaking with competitors, and once fumed at an employee for attending an industry conference: "I don't want you to attend the conference, I want you to be a speaker at the conference."
The aggressive culture has minted millionaire traders and portfolio managers. The top 30 partners have pulled down an average $33 million a year in compensation in recent years, say people familiar with the firm.
Gross himself is rolling in it. Last year, Forbes magazine estimated his net worth at $2.2 billion and ranked him as the 188th wealthiest American. In July, he and his wife, Sue, purchased the Beverly Hills home of actress Jennifer Aniston for a reported $37 million. They own a 11,316-square-foot mansion in Indian Wells, California. They also have a 7,091-square-foot house on 17 Mile Drive in Pebble Beach that backs up to one of the finest golf fairways in the world.
The Gross family's charitable foundation had $272 million in net assets, according to a 2010 federal tax return. The foundation paid out $25.8 million in grants and donations in 2010.
MAN FROM MIDDLETOWN
It's quite a contrast from Gross's upbringing in Middletown, Ohio, and later San Francisco. The son of Shirley, a homemaker, and Sewell, a sales manager for AK Steel Holding, Gross obtained a degree in psychology from Duke University in North Carolina. He briefly played blackjack professionally in Las Vegas, before heading back to California to get his start in the bond business. Gross says he's applied his gambling methods for spreading risk and calculating odds to his investment decisions.
Like a number of other big-name managers who suffered in 2011, Gross is off to a good start this year. As of February 6, the Total Return Fund was up 2.58 percent, beating its main benchmark, the Barclays Capital US Aggregate Bond Index, which was up just 0.88 percent.
Prior to the stumbles of 2011, the Total Return Fund beat 97 percent of its peers in the intermediate-term bond category over 10 years. That winning streak produced total returns of 7.335 percent per annum - an "extremely rare" feat, says Eric Jacobson, director of fixed-income research at Morningstar. Over the 15 years prior to 2011, the Total Return Fund surpassed 99 percent.
But roughly a year ago, Gross took one of the biggest bets of his life, one that would tarnish his record. He sold all of the U.S. government debt holdings in the Total Return Fund on the expectation that interest rates would climb for a long time. They didn't. He ratcheted up his bet month by month thereafter, taking short positions in U.S. interest-rate swaps, financial instruments that traders sometimes use to speculate on a rise or fall in rates.
Gross was betting that inflation would spike because of the vast injections of cash into the economy by the Federal Reserve and heavy deficit spending by the U.S. government. Instead, prolonged economic weakness prompted a big rally in long-dated Treasuries, driving returns over 33 percent higher last year, according to the Barclays Aggregate Index.
By comparison, the PIMCO Total Return Fund returned 4.16 percent last year, placing it in the bottom 10 percent of its peer group, which averaged a return of 6.39 percent.
DEVIL IN THE DERIVATIVES
Gross and PIMCO are facing questions from industry analysts over the Total Return Fund's wide use of derivatives - financial instruments that derive their value from another security - to generate some of the fund's returns.
For years now, a number of industry experts have warned pension investors that the PIMCO Total Return Fund relies heavily on derivatives to gain exposure to bonds and makes leveraged bets using borrowed money - ones that allow it to buy more bonds with less cash as the fund gets bigger.
"This is a fund that is a real challenge for us, especially when you look at its underlying holdings, because of all the derivatives," says Todd Rosenbluth, a senior director and analyst with S&P Capital IQ. "They are accessing parts of the market without having to put as much money up." The catch for investors is that it is difficult to fully fathom the risk of what is in the portfolio.
In a 2009 report, pension consulting firm Ennis Knupp found that the Total Return Fund used hundreds of derivatives, including futures contracts and credit-default swaps - a type of insurance contract written on corporate bonds. The consultants said that by using derivatives, Gross had managed to sometimes outperform competitors.
'NOT A CASINO'
It is in part because of its use of derivatives, and the amount of money it manages for state and corporate pensions, that regulators are considering whether PIMCO poses a potential danger to the financial system and should be subject to heightened scrutiny.
Representatives for PIMCO last year met with regulators on more than a dozen occasions to safeguard its turf, public records show.
Regulators are expected to decide sometime in the next few months about which non-bank financial institutions should be treated as systemically important firms.
Gross is hoping regulators won't lump his firm with the likes of Goldman Sachs, JPMorgan and Citi. While he has embraced the lessons of blackjack as a trader, he insists PIMCO doesn't take the kind of risks Wall Street is famed for.
"This is definitely not a casino," he said. "This is a well-managed, conservatively risked shop where innovation has a significant place."
(Reporting by Jennifer Ablan and Matthew Goldstein, Editing by Chris Kaufman)
