Macaskill on markets: Corporate bond buyers loom larger

Jon Macaskill
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If Pimco did manage to score a $375 million profit by securing an allocation of $8 billion of the Verizon $49 billion bond that delivered roughly $2.5 billion of paper gains to investors after it was launched last September, then it was a rare bright spot in a tough year for Mark Kiesel, global head of corporate bonds at the fund management firm.

Pimco’s specialist investment-grade corporate bond fund managed to slightly outperform its benchmark – the Barclays US credit index – in losing 1.69% for 2013, when the index was down by 2.01%. But the fund also shed almost half of its assets under management, with a fall from $10.2 billion to $5.6 billion, and there have been further minor outflows this year, despite a relatively solid return of just over 4% for the year to late April.

The outflows by percentage of assets for the corporate bond fund were much worse than at Pimco’s benchmark Total Return fund, which has drawn headlines by suffering withdrawals of over $50 billion of investor money in the past year – a hefty amount, but still less than 20% of its assets.

The Total Return fund, which is personally managed by Pimco founder Bill Gross, invests in corporate bonds along with its core treasuries and mortgage holdings, and remains enormous – at $232 billion by the end of March 2014 – which helps to explain why Pimco might have wanted to secure as much as 16% of the total amount of the Verizon bond, which set a record for a new corporate debt issue last year.

Gross remains a magnet for publicity, although a longstanding talent for promoting story lines that help his investments has been overshadowed recently by his attempts to explain underperformance at his main fund and to downplay the staff upheaval at Pimco that ended in the departure of his heir apparent, Mohamed El-Erian.

Kiesel has a lower profile, although by the standards of buyers of corporate bonds at other big asset management firms he is a positive publicity hound. Kiesel speaks at conferences and in the media and publishes a monthly credit market outlook that is similar in format to the musings of Gross, although without the mildly deranged anecdotal flourishes that have come to distinguish the output of the legendary investor.

BlackRock, which is now the world’s biggest asset manager by a comfortable margin, with $4.3 trillion under management, still lags behind Pimco in fixed income, but has a more balanced business mix and is an increasingly important force in corporate bond investing. If unconfirmed reports that it secured $5 billion of the Verizon bond are correct, then it might have had a paper profit of around $250 million after the deal saw dramatic spread tightening.

Rick Rieder, co-head of fixed income for the Americas at BlackRock, is starting to take a higher external profile as the firm appears to weigh how to exert its influence more effectively without drawing unwelcome attention from regulators or other market players.

Rieder spent just over 20 years at Lehman Brothers before it failed in 2008, with roles including head of credit and running global proprietary trading, so he was familiar with the mechanics of corporate bond allocation from both sides of the buying and selling equation long before he joined BlackRock in 2009.

Kiesel and Rieder, along with their less well-known counterparts at other investment firms and pension managers, must be well aware that the growing profile of the corporate bond markets is likely to attract increasing attention from regulators.

It’s good to be the king when it comes to demanding a big cut of a bond that is likely to rally after its launch, but it might soon come to seem wise to be extremely scrupulous when interacting with the bankers who handle the details of allocations.