Have bond investors become too big?
The biggest bond funds now dominate the market for good or ill. Just how much muscle they now wield in the primary market is, however, a matter of some dispute.
Following poor performance and the controversial departure of co-CIO and CEO Mohamed El Erian, Pimco’s Total Return Fund had suffered 12 consecutive months of outflows by the beginning of May this year.
The world’s largest bond fund now has $230 billion under management, down from the $292.9 billion it had in April 2013. In percentage terms that is an 18.8% fall, but what it actually means is that clients have withdrawn $55.26 billion from the fund over the past year.
|Mohamed El Erian
That is nearly equivalent to the entire assets under management of UK fund manager Man Investments as at December 2012 ($57 billion) and is an indication of the kinds of numbers that are now involved when funds of this magnitude experience a change in sentiment. The sheer size of the largest asset managers now in the market has been a topic of discussion for some time, with regulators and market participants alike fretting over the implications of individual institutions and funds having reached such magnitude.
The shrinking of sell-side balance sheets has coincided with a staggering increase on the buy side, raising concern over what impact the sheer size of these buyers – and the size of tickets they need to fill – is having on the primary allocation process itself.
The likes of BlackRock and Pimco argue that while they do now manage trillions, this is across all asset classes and strategies, so the impact is not as great as their critics claim. Some also dispute the perception that larger players now have a greater influence on allocation by arguing that this is the reverse of what is actually true.
In the past in markets such as high yield bookrunners maybe only saw 10 accounts for a deal so if those 10 accounts said yes you had a deal and if they said no you didn’t have a deal. Now there are so many buyers that individually they have less pricing power despite their enormous size, they say.
Others grumble that the size of the largest asset managers means that they now exert undue influence over allocation, leaving even the good-sized players squeezed out of the running. The dealers themselves are at pains to emphasize the importance of a diversified order book, saying that they canvass the large guys to find capacity and the small guys for price tension.
However, with the deals themselves getting increasingly large as well, the big buyers are now so important that every borrower knows that they need them in the book and these are the firms that they want to see on the roadshow.
Indeed, the relationship between issuers and large investors has become so important that very large buyers are often covered in a similar way to a sovereign wealth fund and have direct discussions with the issuer. With access such as this their influence over who that issuer’s bonds actually go to can only increase.