PIMCO recently appointed Eric Mogelof as head of the firm’s Asia-Pacific business, based in Hong Kong. He is a managing director at PIMCO and brings extensive experience to his new role, having worked both in PIMCO’s executive office on firm-wide global initiatives and directly with clients as leader of the Americas institutional servicing team. In the following interview, he discusses PIMCO’s plans for growth in Asia-Pacific.
Q: What are your key objectives for the Asia-Pacific region?
A: Asia-Pacific is a vitally important region for PIMCO. We have devoted substantial resources both to investing in local markets and to serving our local clients in the region. Over 180 PIMCO professionals work in our offices in Hong Kong, Singapore, Sydney and Tokyo, with expertise in core fixed income and non-core markets such as alternatives and opportunistic strategies. This is in addition, of course, to our broader portfolio management, analytics, product management and client-facing global resources. Our first goal, always, is to deliver outstanding investment performance and service to our clients. We also want to ensure that our clients are aware of our capabilities, resources and thought leadership, and make sure that we continue to provide these to our Asia-Pacific clients.
Our macroeconomic outlook for the next three to five years suggests that the global debt overhang may cap economic growth at relatively low levels and limit central banks’ ability to raise interest rates – an environment we call The New Neutral. While the implications for The New Neutral suggest potentially lower asset class returns, we believe there are opportunities to earn attractive risk-adjusted premiums, both through optimized beta exposures and by generating alpha through active management. Given this environment, another important goal for our firm is to closely partner with our clients in developing customized investment solutions that are tailored to their unique investment challenges.
We recognize that the investment landscape and regulatory environment across Asia-Pacific are evolving significantly, so we are working to develop customized local strategies for both local investors within the region as well as for investors outside of it.
Personally, I am looking forward to traveling throughout the region and meeting as many clients as possible to learn firsthand how PIMCO can help them meet their investment goals.
Q: Let’s take a trip around the region, starting with Asia ex-Japan. What are your key goals there?
A: One critical market in the region is China, which requires a thoughtful and nuanced approach. We anticipate that China will continue to move gradually to open its capital account, and we also expect China’s bond market, which now consists of government and corporate bonds, to develop other sectors, offering additional investment opportunities for our clients.
The build-out of PIMCO’s presence in China is therefore a key goal over the secular horizon. We will continue to partner with Chinese institutional investors to bring them globally-oriented investment solutions, and will continue to evaluate opportunities for individual Chinese investors to gain access to PIMCO’s investment capabilities. We are also broadening opportunities for global PIMCO clients to invest in China by participating in programs oriented to foreign institutional investors, such as QFII and RQFII.
Throughout the Asia ex-Japan region, we continue to see institutional investors diversifying their equity exposures and seeking to reduce portfolio volatility. We aim to help these investors meet these goals through our uniquely positioned investment alternatives, which have a time-tested investment process. We also stand ready to help these clients navigate the regulatory challenges that are affecting a broad cross-section of Asian institutions, particularly in the insurance industry.
Moreover, the individual investor base is growing robustly, not only in China but throughout the region. PIMCO will continue to work with our distribution partners to bring quality investment solutions – including income, capital securities and outcome-oriented multi-asset strategies – to this important group of investors.
Q: And turning to Japan?
A: We are closely watching the impact of Prime Minister Shinzo Abe’s dramatic reforms. Under Abenomics, Japan is simultaneously pursuing changes in monetary and fiscal policy as well as a structural re-engineering of the economy. The government is attempting these reforms while contending with significant debt levels and a meaningful shift in demographics as the population ages. While the long-term result is uncertain, there are important economic trends emerging that all global investors should be monitoring. If all three “arrows” of Abenomics are successful, we could see significant reflation in the Japanese economy and a resurgence of aggregate demand.
As one of the largest non-Japanese investment management firms in Japan, PIMCO’s commitment to our Japanese clients is broad and deep. In the coming years, we hope to enhance our partnerships with financial institutions as they explore alternative strategies that aim to reduce volatility and credit strategies that can provide additional sources of carry in a low-return environment. Public pension reforms under Abenomics are important here as well; Japanese pensions are shifting into higher-return assets and corporate pensions are focusing on portfolios with less sensitivity to the equity risk factor (due to better funded status). We stand ready to partner with these clients in their efforts to enhance returns and/or reduce portfolio risks by providing strategies ranging from active Japanese bonds to fixed income alternatives.
We believe our New Neutral outlook, which includes the view that interest rates are likely to remain lower for longer, is generally supportive of fixed income and should encourage more investment from retail investors in actively managed, alpha-seeking strategies.
Also, we have recently seen renewed interest in the developed credit markets and are working with investors to capitalize on opportunities in this space, including in the PIMCO Income Strategy, whose portfolio managers received Morningstar’s U.S. Fixed-Income Fund Manager of 2013 award. We are also actively managing strategies focused on bank loans and capital securities.
Through Abenomics, the Japanese economy seeks to leave behind 13 years of damaging deflation. However, more than ¥800 trillion in individual financial assets remain in zero-yielding bank deposits and are now losing value in an inflationary environment. PIMCO’s income-oriented strategies may help investors manage this new reality.
Q: What are PIMCO’s plans in Australia?
A: Australia’s retirement market is currently the fourth largest in the world and growing. Superannuation funds have been increasing steadily since 1992, when the government first made employer contributions mandatory, and these contributions are slated to rise in the years ahead from the current level of 9.5%. Individuals can also contribute to their retirement funds, adding to the assets to be invested, both before and after retirement.
In general, investors in Australia have maintained a chronic under-allocation to fixed income, or fixed interest, and such allocations can be critical diversifiers and income generators for retirement portfolios and for many other investment objectives. Among our goals is to continue to partner with investors to increase their awareness of the value of bond strategies and help encourage strategic diversification away from equity- and real estate-centric portfolios, which can be highly volatile if not sufficiently diversified. With the Reserve Bank of Australia’s policy rate at an historical low of 2.5%, individual investors may also consider reducing their cash allocations in favor of higher-yielding fixed interest assets with a modest increase in risk.
PIMCO’s Australia institutional business has grown out of close partnerships with our clients. We hope to deepen these relationships by utilizing our solutions frameworks. For example, downside risk management strategies like tail-risk hedging can help clients guard against market downturns without necessarily compromising equity allocations.
Another prominent feature of the Australian market is the strength and maturity of the financial planning and wealth management community. In parallel to the growth in superannuation, we have seen the development of one of the most sophisticated advice markets in the world. PIMCO continues to strengthen our engagement with this segment.
Guiding these efforts will be our new head of PIMCO Australia, Adrian Stewart, who brings many years of experience partnering with both institutional and wealth management clients. Adrian leads a team of talented PIMCO professionals who can leverage their diverse knowledge and experience to help clients optimize their allocations to both core and non-core strategies.
Q: What are the biggest challenges confronting PIMCO’s Asia-Pacific clients?
A: First, the modest-return environment we expect in The New Neutral means it will be harder to meet return objectives through traditional asset allocations. In this environment, alpha generation becomes even more relevant, to avoid the pitfalls of “financial repression.”
Second, as markets continue to evolve, we believe investors will see an ever-increasing number of investment strategies and products that will need to be evaluated in a portfolio and risk management context. Finding the right partner to help harvest these opportunities while mitigating downside risk is critical.
Q: What are the biggest investment opportunities in Asia-Pacific for our clients?
A: We are encouraging clients to think about two central approaches to managing the challenge of meeting return targets in the modest-return environment.
First, consider non-traditional betas that may outperform traditional indices. Examples of non-traditional betas include fundamentally-weighted equity indices or indices with higher carry. Multi-asset-class strategies that incorporate diversified return drivers may also help deliver higher returns. And finally, opportunistic strategies – for example, those that invest in loan portfolios and real estate assets that banks have shed to reduce their balance sheets and meet new capital requirements – may also help generate enhanced returns. PIMCO’s solutions and analytics teams can help our Asia-Pacific clients customize benchmarks and strategies that attend to their unique needs.
Second, explicitly focusing on alpha generation may also help clients better meet their return targets. Active management offers the opportunity for clients to potentially generate higher returns often with benchmark-like volatility. In this respect, PIMCO brings a long-term track record in core, non-core and alternatives investing.
Q: Is there anything else you would like to add?
A: Throughout PIMCO’s history, many of our most successful strategies have emerged from dialogue and collaboration with clients. If there are additional areas where PIMCO can support your investment objectives, please don’t hesitate to raise them with us.
Finally, with growing wealth and increasing investor sophistication, the future of asset management is bright in Asia-Pacific. We look forward to broadening and deepening our partnerships with our clients in the coming years. Though the landscape and opportunity set may evolve, PIMCO’s core mission remains unchanged: using our time-tested process to deliver outstanding service and strong risk-adjusted returns to our clients.