Pimco weighs Asian structured products strategy

US asset manager considers tailoring structured products to meet Asian investorsÆ needs.
Pimco, the California-based fixed-income asset manager, is planning to grow its Asian structured products business. As part of the push it will put an account manager on the ground in the region and is exploring the possibility of launching notes tailored specifically to Asian investors' needs.

Showbhik Kalra will move from New York to develop the business and will be based in either Hong Kong or Singapore. He and Powell Thurston, the firm's structured products head in Newport Beach, are currently in Asia meeting with investors and evaluating opportunities ahead of Kalra's expected arrival by the end of the year.

In addition to Kalra, who will be a dedicated structured products resource, Pimco is also moving Rob Mead from Munich to Sydney next week to manage the firm's Asian credit portfolio. Although he will not be focused on structured products full-time, his considerable experience in the structured credit area should add further weight to the firm's structured products presence in Asia.

Pimco manages roughly $13 billion of structured product assets and 15% of its investors are based in Asia. Growing the business further requires a change of strategy. "Historically we've gone after deals globally," says Thurston. "But the one-size-fits-all approach can be limiting, particularly in Asia, so we are trying to identify regional opportunities we may have missed."

The interpretation of Basel II, for example, is slightly different everywhere in the world, which can mean slicing and dicing products to fit investors' needs û taking a collateral pool and selling ratings-driven collateralised debt obligation tranches to Japanese bank investors and yield-driven equity tranches to Hong Kong, and so on.

According to Kalra, Pimco is even exploring the possibility of creating products that use Asian collateral as the underlying.

Two themes are driving the increased participation of asset managers in the structured products business: investors' increasing understanding of their usefulness, particularly for diversification, and their concern that credit ratings and the assurances of investment bankers are not, by themselves, enough to tempt them into buying products that aren't completely transparent.

Asset managers are changing all that. "We tear these things apart and put them back together again," says Thurston. "Investment banks can transfer risks that in our opinion aren't fair - they always want to make sure the odds favour them. When we come in, we are very involved. We want to make sure that investors get what they are expecting and that the investment bank's fee reflects all the profit they stand to make."

Of course, banks know that investors are wary of buying complex products from them. They also know that deals negotiated by an asset manager, passed through their internal controls and scrutinised by their risk committee are much more marketable to institutional investors than their own stand-alone offerings.

To be fair, it is not just the perception of investment banks' greed that concerns investors. Many structured products only pay out at maturity, which means that an unmanaged strategy gone bad can leave investors sitting on a zero-coupon bond for 10 years. So as well as keeping the bankers honest, asset managers can also help to mitigate losses, but only if the structure provides enough flexibility.

"We need to be able to add value," says Thurston. "And that's not always the case. The way products are structured sometimes restricts our ability to do that."
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