(MENAFN- Gulf Times) Pacific Investment Management Co (Pimco) is facing an emerging-markets exodus.
The fixed-income powerhouse is seeing unprecedented client defections from its developing-nation mutual funds as poorly timed investments and below-average returns catch up with the firm. Customers have pulled about $10bn since the start of 2013, according to data from the fund manager. That's more than 20% of Pimco's emerging-market dedicated assets and triple the average for the industry at large, according to Bloomberg estimates.
Pimco's emerging-markets group, which lured more money than anyone else as developing-nation debt surged following the financial crisis, is now losing ground to rivals including Goldman Sachs Asset Management and HSBC Global Asset Management that have been better able to weather currency declines, slowing growth and geopolitical conflict.
Redemptions have been exacerbated by discord at the $1.7tn money manager that led to the exit last year of Co- Chief Investment Officers Mohamed El-Erian and Bill Gross. While many Pimco funds have posted outflows since their departures, those in the emerging-market funds trace back to long-standing struggles at the firm.
"A lot of their long-term investment preferences have hurt them over the last few years," said Karin Anderson, a Morningstar Inc analyst in Chicago who covers Pimco's emerging- market bond funds. "They're able to take really big bets versus the index and some of them didn't go their way recently."
Wagers on Russia last year and Brazil in 2013 in particular crimped returns, Anderson said.The fund manager takes a long-term approach to investing in developing markets, and the asset class remains a key component of a diversified investment portfolio, according to Michael Reid, a spokesman for Newport Beach, California-based Pimco. He declined to comment on the performance of specific funds.
"The investment themes in Pimco's emerging-markets portfolios are based on long-term views that, despite recent volatility, offer compelling risk-reward opportunities for investors willing to be patient and selective," Reid said in an e-mailed response to questions. "Broadly speaking, investors tend to be under-allocated in emerging markets, particularly as recent volatility has prompted many investors to seek returns elsewhere."
Pimco has been the dominant player in the bond fund industry for years. In March 2013, its assets under management surged to a record $2.04tn - an amount that roughly equals the annual economic output of the Netherlands, Switzerland and Austria combined - before starting to fall the following month.
While it's been a difficult stretch for most developing- nation asset managers, Pimco's struggles have been particularly acute. Michael Gomez, who succeeded El-Erian as emerging markets head in 2005, now faces challenges across the portfolio.
His $8.6bn local-currency bond fund, still the largest of its kind in the world, has underperformed two-thirds of rivals over the past three years, Bloomberg data show. Clients pulled $3.7bn from the flagship Emerging Markets Bond Fund last year, according to Bloomberg estimates, leaving assets at just $2.5bn.
And high-profile missteps on companies such as former billionaire Eike Batista's OGX Petroleo & Gas Participacoes SA have hurt Pimco's reputation in the corporate debt market, where its main fund has lost more than three-quarters of its assets in a year and a half. Yet no wagers have been as costly for Pimco as those on government debt in Brazil and Russia.
While outsized bond returns in Brazil more than a decade ago helped establish the asset manager's status in emerging markets and burnished the reputation of El-Erian, Brazil is now a frustration for Gomez and his colleagues.
A benchmark interest rate at 12.25% has proved insufficient to shield fixed- income investors from stagnating economic growth, soaring inflation and widening budget deficits.
Brazilian local-currency bonds have lost 20% in dollar terms since early September and even declined 3.3% when hedging out currency risk, according to data compiled by JPMorgan Chase & Co.
Debt sold by Petroleo Brasileiro, which Pimco lauded as an attractive investment in April, has plunged since November as a corruption investigation at the state-controlled energy company led to the resignation of Chief Executive Officer Maria das Gracas Foster earlier this month.
In Russia, sovereign and corporate bonds tumbled last quarter as the threat of military conflict in Ukraine, collapsing oil prices and international sanctions pushed the energy-exporting country to the brink of recession.
As of December, the two countries made up 50% of the assets in the Emerging Markets Bond Fund on a market value basis, compared with 15% in its JPMorgan benchmark. Exposure to the two countries measured by duration equalled 23%.
Total assets in 11 emerging-market mutual funds managed by Gomez have fallen to less than $28bn from a peak of about $51bn in 2013, Bloomberg data show.
Others are struggling too, of course.
The Pictet Emerging Local Currency Debt fund has seen total assets fall to less than $6bn from $14.4bn in 2013, while Fidelity Investments's New Markets Income Fund has lost $2.7bn in the last two years.
Emerging-market local debt has lost 16% in dollar terms in the span. Returns on dollar-denominated bonds have also fizzled, returning just 4.8% over that time, JPMorgan Chase & Co index data show. "In a bull market, the easiest way to outperform is to take a bit more risk than the benchmark," Kieran Curtis, an emerging-market debt manager in London at Standard Life Investments, which oversees £195bn ($302bn) as of June, said in e-mailed response to questions. "Clearly this doesn't work in the type of markets we've seen the last couple of years. It's a mathematical fact."
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