It is 10 years since PIMCO, the fixed income manager based in the US, began operations in Europe as PIMCO Europe. Since then, it has grown from an operation with a fingernail hold on the European market to one with a substantial presence in Europe.
PIMCO Europe’s London headquarters, set up in 1998 with a complement of staff that could fit comfortably in a black cab, now employs 150 people. A further 100 work from the Munich office of Allianz Global Investors (AGI) Germany, the asset management arm of Allianz, which acquired PIMCO in 2000.
PIMCO Europe has also developed from being a provider of global asset management to a provider of global plus local. Joe McDevitt, (pictured right) the head of PIMCO Europe’s London office, and the man responsible for building PIMCO’s presence in Europe over the past decade, says this has been the main achievement: “Getting ourselves to a position where we are viewed as a credible local provider has been key to us in important markets like the UK and other European countries.”
The European operation was able to take advantage of the economic conditions of the times, he says. “We benefited hugely from coming here at a time when there was a lot of change, driven partly by the big equity market meltdown in 2001 and partly by changes in regulations, which posed challenges to pension funds in terms of meeting their liabilities.”
US connections also helped the Europe office build European business initially. “In the early years we focused on leveraging existing relationships, which would have included subsidiaries of US corporations where PIMCO relationships already existed in the US,” he says.
“What also benefited us was that key global consultants knew us well in the US and were therefore happy to put us forward when they realised we had a capability in Europe to service clients locally.”
PIMCO Europe initially worked off its US investment platform, McDevitt says. “Our flagship capability in Europe was global fixed income, and that worked pretty well with some global multinationals whose default allocation to fixed income was global fixed income.
PIMCO Europe also offered access to specialist products, notably US fixed income. Other specialist offerings included high yield and, eventually, emerging market debt, following the recruitment in 1999 of Mohamed El-Erian - now co-CEO and co-CIO of PIMCO.
“There were a few clients in Europe that were large enough to make a special allocation to the US, but they were the exception rather than the rule. Most people got their allocation to the US through a global allocation,” says McDevitt.
PIMCO Europe’s pitch for European business was strengthened when PIMCO was acquired by the German insurance giant Allianz in 2000. This added the resources of the asset management arm of Allianz; the Munich based Allianz Dresdner Asset Management (ADAM), now Allianz Global investors (AGI).
“ADAM’s fixed income group, previously based in Frankfurt, moved to Munich to join the team there under PIMCO leadership,” McDevitt recalls. “We worked hard to build the Munich and London teams into a single group that now fits together quite nicely.”
Strategically, PIMCO has a ‘below the line’ presence in Germany. “Allianz had substantial resources in Germany with long histories covering the client base there. Rather than try to reinvent the wheel, the logical thing for us to do, as the fixed income provider, was to find efficient ways of interfacing with those resources.
“So in Germany we reach the market through AGI Germany. We manage the assets but they provide the client-facing activity.”
PIMCO Europe operates in a similar manner elsewhere in Europe. In France, it works with AGI France, formerly AGF. “Our goal there is to operate alongside and with that group, particularly now that we’ve grown in scale,” McDevitt says.
In Italy and Spain, PIMCO also works alongside AGI local asset management entities, AGI Italy and AGI Spain.
In other European markets, such as the UK, Benelux, the Nordics, Switzerland, and Ireland, PIMCO Europe operates directly and independently of AGI.
PIMCO Europe now has $93bn (€64bn) assets under management. The UK accounts for more than a third of these ($33bn), followed by the Middle East ($19bn), Benelux ($12bn), the Nordic countries ($6bn), Switzerland ($4.8bn), Italy ($3bn), Austria ($1.5bn) and Spain ($1bn). “What is exciting is that today close to half of that $93bn is managed from this platform in Europe,” he says.
The euro’s arrival helped PIMCO Europe dig itself in. “We saw the euro as something that we could take advantage of, because it was going to create deeper markets.”
PIMCO Europe responded immediately with a euro-friendly product. “From the first day of the euro, the global desk created and ran a euro fixed income fund using PIMCO’s philosophy and process. By 2000 we had committed to managing European fixed income locally.”
The opportunity to manage UK fixed income locally was not helped initially by the move of UK pension funds from balanced to specialist mandates, since the focus was on a higher allocation to equities than to bonds. Yet plummeting equity markets and a tougher regulatory climate changed all that, says McDevitt.
“We decided that this would be an opportunity for us to create a UK fixed income capability here.” he says.
PIMCO Europe has also been successful in convincing European investors that derivatives are an essential tool in portfolio management. “Derivatives can be used to achieve more efficient portfolio management rather than to raise risk, and we use derivatives as a way of gaining exposures we want and removing exposures we don’t want,” McDevitt says.
“One of the big changes we’ve seen across Europe is the growing acceptance of the use of derivatives. It has been a long education process, but even in the UK, the governance capacity of pension funds to meet with managers like PIMCO and talk about the use of derivatives and get comfortable with them has grown significantly.”
The growing interest in liability-driven investment (LDI) over the past five years has been one of the drivers, he says. “Many pension funds are coming to realise that without derivatives there is no LDI - it can’t be done.”
The current credit crunch has left PIMCO Europe in a relatively strong position, McDevitt says. The firm has dodged the punches of the sub-prime crisis: “We weren’t heavily exposed to this kind of risk and we’re grateful for that.”
PIMCO was always wary of structured products that transformed high risk loans into low risk returns, he says. “We were on the record quite early on saying that we didn’t find this creative finance credible, particularly as we knew the underlying driver of a big chunk of this was the sub-prime mortgage market.
“In the US, we sent out analysts from our trading room to ride round with real estate brokers, to see what was going on. And they didn’t like what they saw.”
The credit liquidity crisis represents an opportunity for PIMCO Europe, McDevitt says. “This time last year we would have told you the credit markets were much too expensive to be in, but here we are and it is looking pretty attractive right now.
“Over recent months we have begun to take advantage of what we see as cheap credit opportunities. Bank debt as well as bank loans have become quite interesting.”
There now is strong demand for credit investment, he says. “In our existing client portfolios, where we have mandates to tactically add various opportunities, we are seeing an increase in bottom up credit risk. We also see flows from clients into our existing specialist credit funds and credit products.”
In the current climate, where there are worries about corporate credit defaults, the focus is on investment grade credits, he says.
“Investment grade is probably less susceptible to default risk if we do end up in a significant recession, so we’re more comfortable with investment grade at the moment than we are with high yield. But at last we are being paid to take risk - which is nice.”
Joe McDevitt is managing director and head of PIMCO Europe’s London office. McDevitt joined PIMCO in 1998, from Salomon Brothers Asset Management in London, where he was a managing director with responsibility for business development and client services. Before that, he spent six years on Salomon’s London trading floor as a multi-currency fixed income specialist and was also an account executive with Merrill Lynch in Asia. McDevitt holds a bachelor’s degree from Bowdoin College and an MBA from the Harvard Business School.
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