(Repeats to additional subscribers with no changes)
* Loomis merges fixed income and equities groups
* Gundlach’s DoubleLine has new equities division
* Yield hunt boon for bond funds, with $1 tln in new cash
By Jennifer Ablan
Jan 23 (Reuters) – Some of the biggest U.S. bond firms are
making aggressive pushes into the $5.17 trillion equity market
business, spurred by fears the bull market in fixed income
could end and anticipation of growing retail investor interest
in stock funds.
After five years of monstrous cash inflows into fixed income
markets, bond giants DoubleLine Capital LP, Loomis Sayles & Co
and PIMCO are strategically targeting a bigger share of equities
– an area that many investors have shunned in recent years.
“We have been in equities for a long time, but now we have a
heavy focus on growing that business because we think it is a
very good place to be in the years to come,” said veteran bond
investor Dan Fuss, vice chairman and portfolio manager at Loomis
Sayles, which oversees $182 billion in assets.
The firm has united its fixed income and equity investment
groups under new Chief Investment Officer Jae Park, who used to
oversee fixed income only. It has $18 billion in equity assets
under management and hopes to increase that through affiliate
Natixis Global Asset Management’s distribution network, Fuss
said, without giving a target.
DoubleLine, the $53 billion bond firm run by Jeffrey
Gundlach, announced in early January that it is rolling out a
new division called DoubleLine Equity LP.
And PIMCO, home to the world’s largest bond fund with $1.92
trillion in assets under management as of June 30, 2012, has in
the last 12 months introduced the PIMCO EqS Long/Short Fund D
, a long-short equity hedge fund.
“The big bond houses have been riding this huge wave in
fixed-income for five years. They know not to rely solely on one
asset class for revenues and fees. It can’t last forever,” said
Gregory Peters, Morgan Stanley’s Chief Global Cross Asset
Strategist. “Mathematically, it is difficult to match the bond
returns we have seen in recent years. Impossible.”
Even for respected bond investors such as Fuss, Gundlach and
PIMCO’s Bill Gross and Mohamed El-Erian, a push into equities is
not without risk. They have to compete with equities industry
veterans such as Fidelity Investments, one of the biggest
providers of 401(k) retirement savings plans, Vanguard Group,
known for its wide range of index-tracking funds, and BlackRock
Inc, which has dominated exchange-traded funds.
Money managers have also been plagued by a price war between
ETFs and plain-vanilla mutual funds, which has pressured
margins. ETFs are popular in part because they tend to charge
considerably lower management fees. BlackRock, for example, has
cut its fees on a handful of ETFs as competition heated up.
Still, that has not deterred bond fund managers who expect
mom-and-pop investors to develop a bigger appetite for equities
amid an improving economy after largely missing out on last
year’s 16 percent rally in the S&P; 500. The index is up
more than 120 percent since March 2009, marking what many
analysts have called the least celebrated bull market.
Gundlach criticized the “closet indexation” strategy that he
said many influential equity portfolio managers use, which is to
pick stocks to achieve returns similar to a benchmark index
without replicating the index exactly. He called that passive
investment management “masquerading” as active management.
“I like to think that at DoubleLine we’ve had some impact on
shaping the fixed-income management business in terms of getting
away from closet indexation; in terms of thinking creatively,
managing actively,” Gundlach told Reuters.
Last week, the firm registered the DoubleLine Equities Small
Cap Growth Fund, the DoubleLine Equities Growth Fund and the
DoubleLine Equities Global Technology Fund.
Gundlach has gained respect in the equity world since his
March 18, 2009, forecast that the S&P500; would rise from
768 points at the time to finish the year at the 1,000 level.
That forecast defied the prevailing market uncertainty and
proved prescient – the S&P; ended 2009 over 1,100 and his
comments marked the start of the bull market.
ROTATION IN FIRST STAGES
About $1.1 trillion in net new cash has flowed into bond
mutual funds since 2007, according to data from Thomson Reuters’
Lipper service, reflecting investors’ flight to safety from the
U.S. and European debt crises, as well as expectations that bond
prices will rise as interest rates fall.
From retirees to corporations such as Google Inc,
many investors sought higher investment returns by putting money
in ever-riskier credits, including speculative “junk” bonds.
Reflecting a rise in demand, the average junk bond yield has
fallen to 5.975 percent from about 19 percent in January 2009.
“I hate to call it a ‘bubble’ per se, but most of these
firms – as happy as they are because their bond businesses are
doing so well – I think many of them are very worried that there
is going to be a reckoning at some point when yields begin to
spike and the credit rally peters out,” said Eric Jacobson,
director of fixed-income fund research at Morningstar.
Another issue is the management fees that bond firms can
charge, which are much lower than in equities.
The average expense ratio on a U.S. open-ended equity mutual
fund is 1.36 percent, while the average expense ratio of a U.S.
open-ended bond fund is 0.98 percent, according to Morningstar.
“Hard to charge a lot when yields are so low,” said David
Schawel, a fixed income portfolio manager who writes for the CFA
Institute.
PIMCO began expanding its equity business in earnest three
years ago and launched its first actively managed equity mutual
fund, PIMCO EqS Pathfinder Fund, in April 2010. It had
a slow start, coming at a time of record volatility in global
stock markets, which scared off investors already wounded by the
housing bust.
El-Erian said the equities expansion was an essential part
of PIMCO’s “multi-year evolution” to become a one-stop shop for
investors rather than a dominant firm only in bonds. In part
because of the equities growth and other business expansions,
PIMCO has outgrown its current headquarters in Newport Beach,
California, and will be moving to a new 380,000-square-foot,
20-story office in the first half of 2014.
“Who is to say they won’t be successful in 10 years?”
Jacobson of Morningstar said. “I really like what PIMCO is doing
by building their equities business from the bottom up, rather
than going out and buying an equities firm. The history of doing
that is very checkered.”
Vanguard’s principal in the portfolio review group, Dan
Newhall, told Reuters he was keeping an eye on the competition
and noted how crowded the market was becoming.
“For major bond players PIMCO and DoubleLine, it could be
very challenging. There is room for a ‘name player’ to come and
gather equity assets, but it is a very crowded field with many
well-established names that are already there in active equity
management,” Newhall said.
When asked to respond to Vanguard’s comments, Gundlach said:
“They could have said the same thing about fixed income asset
raising prospects four years ago.”
(Reporting by Jennifer Ablan; Editing by Tiffany Wu and Andre
Grenon)
