Funds eyeing growth look past boxes

Faced with an increasingly global market in which the United States plays a diminished role, asset management companies must rethink how they approach investing.
JUN 30, 2008
Faced with an increasingly global market in which the United States plays a diminished role, asset management companies must rethink how they approach investing. That's the message championed by Mohamed El-Erian, co-chief executive and co-chief investment officer of Pacific Investment Management Co. LLC of Los Angeles. "We have been retooling Pimco," he said during an interview after addressing attendees last week at the Morningstar Investment Conference in Chicago. "I agree with Mohamed's basic thrust," Brian Rogers, chairman and chief investment officer of T. Rowe Price Group Inc. of Baltimore, said in an interview at the conference.
It's why T. Rowe is pouring more resources into developing global products, he said. The company is "aggressively" hiring more people on the investment side to help with global and international products, Mr. Rogers said, noting that investors should expect to see such products soon, but declining to go into detail about what they may look like. Other asset managers are doing the same, according to industry experts. "They are all struggling to address these issues," Geoff Bobroff, an industry consultant in East Greenwich, R.I., said in a telephone interview. In Pimco's case, retooling means coming out with products that attempt in new ways to generate alpha, or returns that exceed a benchmark index. Mr. El-Erian highlighted Pimco's plan to launch a new "forward-looking" index, on which its planned Pimco Global Advantage Strategy Bond Fund will be based. Pimco has yet to identify the index provider, and Mr. El-Erian declined to provide many details. The legendary bond shop also has filed with the Securities and Exchange Commission to offer the Pimco Unconstrained Bond Fund. The fund may invest in derivative instruments, such as options, futures contracts or swap agreements, or in mortgage- or asset-backed securities, according to its prospectus. Such products fit into Mr. El-Erian's view that financial markets are in transition. There's a "gradual realignment of global economic power" occurring, he said at the conference. Today, a "flight to quality" means leaving the U.S. to invest in other countries, Mr. El-Erian said. Of course, market gurus have predicted fundamental change before, and investors who bought into the predictions paid the price, industry experts said. In the late 1990s, when technology companies took off, many Wall Street seers perceived fundamental economic and market shifts taking place. Far fewer analysts predicted the bursting of the tech bubble. More recently, investors came to believe that real estate was a win-only investment. Then the subprime market imploded and real estate prices started on a downward slope that has yet to level off. "Wall Street has a tendency to push trends," Peter Langerman, chairman, president and chief executive of Franklin Mutual Advisors in Short Hills, N.J., said during an interview at the conference. And that won't change, said Mr. Langerman, whose company manages the Mutual Series Funds. But the market realignment today feels different, Robert Torray, founder of Torray LLC of Bethesda, Md., said in an interview at the conference. That doesn't mean he intends to change his philosophy. "I have learned from experience, nothing can overcome [company] fundamentals," said the self-described bottom-up stock picker, who advises the Torray Funds. That may be true, but asset managers still are coming out with new, ever-more exotic products. DWS Scudder, the U.S. retail division of Deutsche Asset Management Inc. of New York, a subsidiary of Deutsche Bank AG of Frankfurt, Germany, has been particularly active in developing alternative-investment strategies, Mr. Bobroff said. Last year, it launched the DWS Alternative Asset Allocation Plus Fund, which invests in underlying DWS funds and investment strategies that include commodities, inflation protection, real estate and emerging-markets assets. While there is nothing wrong with fund companies being innovative, any new product requires "more analysis," Charles Lieberman, strategist and chief economist with Advisors Capital Management LLC, said in a telephone interview. His Paramus, N.J.-based firm manages $250 million in assets. Such analysis can make advisers even more important to their clients, said Howard Schneider, president of Practical Perspectives, an industry consulting firm in Boxford, Mass. While Mr. El-Erian talks about the need to "rethink" asset allocation in light of changes to the financial markets, it's the advisers who will have to do the thinking, Mr. Schneider said in a telephone interview. Looking at the products that are likely to come down the pike, adviser talent will be put to the test. "I would expect that, over time, the pace of [product development] will increase," Mr. Schneider said. "Tools that were previously reserved for sophisticated investors are growing." Investors will be able to take advantage of "exciting new opportunities," Mr. El-Erian told attendees. He warned, however, that as the financial markets change, and emerging markets become more important, investors should expect greater volatility. With a new market environment comes a "high probability of market accidents," Mr. El-Erian said. E-mail David Hoffman at [email protected].

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