“I would like to come back as the bond market. You can intimidate everybody.” This was allegedly the ambition of a political adviser to Bill Clinton, overawed by the power of the bond market to influence government.
The individual who has come closest to fulfilling this dream is Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, the bond investment manager.
Despite being the man ultimately in charge of $747bn (£529bn, €596bn) worth of assets, mostly bonds, Mr El-Erian is dismissive of claims Pimco is worryingly powerful in the bond market.
“We don’t think in those terms. We live in a world of constructive paranoia,” he says, adding this is focused on continuing to add value for clients. “We have over 8m clients in the US and millions more around the world. We manage money for teachers, policemen, firefighters, across a whole range. If people entrust you with their assets, you have to continuously work at what the world will look like.”
That view of the world is not sunny at the moment. “2009 will be as bad as 2008,” predicts Mr El-Erian. This crisis has now morphed into “something much more sinister” than a market downturn. Pimco’s house view is that the world has changed fundamentally, and the firm is trying to position itself for the “new normal”, without knowing precisely what that will be.
“There are three things that are unambiguous about the new world,” says Mr El-Erian. First he predicts a shift in the balance of power between private and public sectors as governments step in, first to bail out collapsing markets and industries, then to regulate them in the future. “This is very consequential,” he says, because it will affect “price formation, risks and capital structure”.
Then there will be “massive consolidation in the financial industry, which is going to play out in every segment of the industry”. Finally, underlying all this is a major change in the global growth dynamics, as multiple growth engines, largely from the developing world, replace the single engine of growth of the US-centric twentieth century.
While the ride there may be very bumpy, Mr El-Erian is confident Pimco has the necessary skills to deal with the new world order. As governments get more involved in financial markets and regulation becomes a more high profile element of the framework of capital markets, investors will need an extra skillset, that of dealing with public policy.
Mr El-Erian’s background, including 12 years as an economist with the International Monetary Fund, should help a bit, but Pimco is not relying on this. Instead, it has beefed up its public policy expertise with recent appointments such as Andrew Balls, a former Financial Times journalist and brother of the UK education secretary.
The IMF background, and the fact that Mr El-Erian started his Pimco career as an emerging markets bond manager, should also be helpful with that other aspect of the brave new world, the increased importance of economies such as India and China.
He is adamant this is not the reason Pimco called him back from Harvard Management Company after just two years in the top job there. “There isn’t causality, but there is coincidence. It just happens I have that experience.”
Emerging markets experience will not just be helpful when the world finally reaches some form of stability, he says. It is useful now, during the crisis.
“Industrialised countries find themselves in a very unfamiliar situation. This crisis is happening at the centre of the global system, not on the periphery, and the centre is not wired for crisis management. The skillset we have found very useful at Pimco is our emerging markets team.”
Speaking during a press day where Allianz Global Investors, Pimco’s parent, announced its results, Mr El-Erian was notably calm for someone predicting gloom and doom.
This may in part be due to being a bond investor – the bond markets have not seen the terrible plunges of equity markets in the past 12 months – but is also due to Pimco’s foresightfulness, he claims.
During the past 10 years, while other commentators noted the moderation of volatility and interest rates on world markets, Pimco identified a “stable disequilibrium”, a temporary state that would be followed by market turmoil. In order to meet this rocky future, now realised, it developed what Mr El-Erian calls a “forward looking bond index”.
The Global Advantage Bond Index covers both sovereign and corporate debt and employs a methodology Pimco hopes will be less pro-cyclical than traditional indices.
Building an index like this is not traditionally the job of an investment manager, but Pimco felt that “because of our standing in the market, we had an obligation to put something out there to be discussed”, says Mr El-Erian, in the first hint of acceptance that his company is a powerful player in the financial world.
With the expectation that the global economy will be less centred on the US comes a need for such a large company to think of itself as global. With nine offices around the world, including a recently opened base in Hong Kong, Pimco is making that transition. But it will take it slowly, says Mr El-Erian, ensuring the company remains true to its values.
Among these values is a self-definition as an “investment manager” as opposed to an asset manager. The difference, he explains, is the focus on investment returns for clients, rather than gathering assets.
Mr El-Erian himself is part of the investment returns search – as well as being chief executive and co-chief investment officer, he recently announced he would be lead portfolio manager on a new fund based on the Global Advantage Bond index.
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