Asset Management: Pimco prepares for ‘harder landing’ 

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Markets are too optimistic, says Pimco’s Ivascyn

Bonds are back, as pretty much every investment house is telling its clients in the rush of mid-year outlooks. But that is not necessarily a smooth process.

For bond giant Pimco, the good news is, as chief investment officer Daniel Ivascyn told my colleagues Mary McDougall and Katie Martin, flows have “materially improved” this year after a torrid 2022 when it suffered heavy outflows every quarter — to the tune of €75bn across the firm during the full year. 

Morningstar data shows the Allianz-owned Californian fund manager has had fixed income inflows every month this year as investors grab the higher yields as part of a wider rush to fixed-income assets.

But Oliver Baete, Allianz’s chief investment officer, told Bloomberg that Pimco’s flows were “still shaky” as investors assess the outlook for interest rates. 

Ivascyn said in an interview with the Financial Times that even for investors who do not think central banks will be able to bring inflation back down to target, fixed income provides the best value we have seen for “many many years”. Real inflation-adjusted yields in the US are at levels not seen since the global financial crisis.

Warning that the market may be too sanguine about the prospect of central banks delivering a “soft landing”, Pimco is loading up on high quality government and corporate bonds for now, avoiding areas that will be most vulnerable in a recession.

But Ivascyn is waiting for companies’ credit ratings to be downgraded, which he expects to prompt forced selling among vehicles like collateralised loan obligations. This will herald the time to snap up bargains.

He says:

“A great trade will be to take advantage of the violent repricing of the public markets and then wait for private markets to adjust over the next few years and then rotate into what should be a really attractive opportunity.”

Read the full interview here

Silver Lake focuses on ‘all-in bets’

Silver Lake is concentrating its investments on “big all-in bets” as one of Wall Street’s most closely followed investors raises the ambition of its dealmaking operations amid expectations that more volatile markets will unearth large opportunities. 

Egon Durban, co-chief executive, said the $98bn-in-assets technology-focused private equity group will focus on fewer but larger investments such as its $12.5bn takeover of software company Qualtrics that closed last Wednesday. 

“If you see us invest right now, by definition it will be a big all-in bet,” Durban told my colleague Antoine Gara in a rare interview. “You’re going to see us do . . . a handful or two of large, really important investments a year and that’s it.” 

Durban’s comments contrast to many of Silver Lake’s main private equity rivals which are focusing on smaller deals after rising interest rates have led to a sharp slowdown in deal activity. But he said the tightening financial conditions had presented opportunities to back tech companies that were previously out of reach for private equity buyers. 

“Our greatest successes as an institution have been when we are big in terms of capital and in firm resources committed,” he said. Silver Lake’s €2.4bn move to take over Software AG, one of the largest technology companies in Europe, progressed this month after a rival bidder withdrew their effort. 

Silver Lake first invested more than $500mn in Qualtrics, which invented specialised software analytics tools that help companies respond to online customers, during the tech group’s 2021 initial public offering. Qualtrics shares soared to give the company a near $30bn valuation in the months after the listing but fell by about two-thirds last year. 

That gave the buyout group the opportunity to assemble a takeover having already held a large public shareholding and representation on Qualtrics’ board. Durban had also grown close to Qualtrics founder and chair Ryan Smith and its chief executive Zig Serafin, who will continue to run the company. 

Chart of the week

The UK has missed out on a global stock market rally so far in 2023 as the Bank of England’s rush to raise interest rates and falling oil prices hold back the FTSE 100.

London’s main benchmark has lagged well behind other big developed market indices, up less than 0.5 per cent from the level at which it finished 2022 by Thursday’s close, having fallen 2 per cent this quarter, writes George Steer in London. The latest setback for a market that has long been out of favour with investors at home and abroad has dashed hopes that last year’s relative resilience heralded the start of a longer period of catch-up for the FTSE.

Rich in oil majors and other cash-generative value stocks but lacking large technology groups able to benefit from the recent hype around artificial intelligence, the UK makes for a relatively hard sell, analysts say. Meanwhile, relatively turbulent politics and uniquely stubborn inflation act as further deterrents to international investors.

Weak oil prices, rising rates and doubts over the BoE’s ability to rein in inflation have all contributed to the FTSE “putting up such a pedestrian show”, says Russ Mould, investment director at AJ Bell. “There’s not much tech or AI hoopla to be had,” he said.

Five unmissable stories this week

Odey Asset Management has asked investors to support a restructuring of one of its oldest funds as part of wider efforts to extract its founder, Crispin Odey, from the business in the wake of allegations of serial sexual misconduct. Meanwhile its star fund manager James Hanbury is in “advanced talks” to move his portfolio to boutique advisory firm Lancaster Investment Management.

Advisers to the world’s largest private equity firms are warning new merger notification rules proposed by US antitrust agencies threaten to disproportionately affect the serial dealmakers and significantly delay getting transactions over the line.

The £90bn Universities Superannuation Scheme (USS), one of the largest investors in Thames Water, has given its support for the utility as other industry figures sought to stave off any possible nationalisation of the sector. 

A Labour government would seek to unlock at least £10bn a year of extra money from banks and insurers to invest in Britain’s clean energy industry, shadow City minister Tulip Siddiq has revealed.

The City minister and the chief of the London Stock Exchange have hit back at pension funds over their complaints that proposed changes designed to make the UK more attractive to public companies would water down investor protections.

And finally

From politics, economics and history to art, food and, of course, fiction — FT writers and critics choose their favourite reads of the year so far.