Lee Thomas

When Lee Thomas’s plans to view an eclipse in Munich were almost thwarted by heavy cloud cover, he simply hired a helicopter to take him high enough to get a clear view. If only it were so easy to see what was going to happen next in the bond markets, Thomas’s job would be as much of a pleasure as his favourite pastime.

As global bond strategist at US fixed-income manager Pimco, which has over $274 billion in assets under management, Thomas is only too aware that the bond markets have not been a pretty sight lately.

How they’ll look over the coming months is a question that occupies him each morning as he drives to work at Pimco’s global headquarters in Newport Beach, California. “I spend a lot of time thinking about the macroeconomic situation and wondering whether the economy will implode,” he says. “What really plays on my mind is: ‘Am I mistaken? What if the US does a Japan? Because if interest rates go to 1.5% then it doesn’t really matter what else you do.”

Fortunately, he relishes the challenge. “I’m fascinated by markets,” he says. “It’s the best job in the world to try to beat markets that are so close to being efficient. It’s like playing a high-intensity game of intelligence like chess or backgammon. Except it’s not a game.”

The harsh words he uses to describe the market excesses of the past few years indicate that he feels some people forgot that. “Instead of sticking to the fundamentals, the professional investment community became totally mesmerized by fads,” he says.

What shocked him was not that Enron used deliberately confusing off-balance-sheet financing, or that WorldCom mis-stated its expenses, but that professional analysts and money managers did not see through these ruses. Amid all the finger-pointing in the aftermath of these huge collapses, he says, not enough blame was directed towards investors. “Our job in a capitalist society is to allocate capital to the most productive areas. Allegedly we do this very important job for society better than anyone else, but this time we failed.”

Bottom fishing

Thomas’s approach has been to stay out of the credit market altogether until recently, thereby avoiding much of the crash and burn. Only now is Pimco making a move into corporate bonds. Its fund managers have been picking up bonds over the past two months in sectors that have been tarnished – such as telecoms and energy. And, unlike some of its peers, Pimco has been hedging its bets by steadily increasing its exposure to non-dollar bonds.

That was Thomas’s brief when he was hired in 1995. At that point, Pimco was one of the pre-eminent US dollar bond managers in the world: Thomas’s role was to help it achieve similar status in the non-dollar markets, where it didn’t yet have much of a presence. More than 10% of Pimco’s holdings are now in this segment of the market.

Among Thomas’s qualifications for this role was a knowledge of the European markets: he spent seven years working in London, first for Goldman Sachs covering equity and equity-related securities, and then at private-equity firm Investcorp. His roots were in fixed income though.

He’d started off at Chase as an economist looking at the foreign exchange markets before moving into non-dollar bonds in the mid 1980s. “Joining Pimco gave me the opportunity to meld what I knew about Europe with their high-tech management style,” he says.

Currently, Thomas is working on a plan to blend Pimco’s technological expertise in fixed income with parent company Allianz’s equity know-how and rejig the the somewhat outdated concept of balanced funds to create a new product, which he believes could be the next big thing. “The problem is that people think of balanced funds as dinosaurs, because what’s around today is generally of a low quality. You have one portfolio manager who is trying to make the most of having the option to invest in debt and equity but who has no idea about risk modelling and is really just a gunslinger.”

Fund managers in Europe – where balanced funds have been and gone – are sceptical. But the opinions of a man who has avoided the fallout from Enron and WorldCom merit serious attention. If new-style balanced funds do become popular, the face of investment management will be changed for good.