(Pictured: Jennifer Bridwell)
PIMCO’s alternatives area tends to fly under the radar compared with the bulk of the firm’s fixed interest business, but since 2008 it has become very active through a range of opportunistic debt-orientated strategies which have taken advantage of distressed situations. The world’s largest bond manager now has about US$25 billion in alternatives.
Jennifer Bridwell says the manager will launch a hedge fund, though, only when the strategy fits within its established skillset. Recent strategies have been mainly about “attractive entry point investments” and the areas in which PIMCO has the highest conviction are in “doing what the banks won’t do”. PIMCO has about $16.5 billion in hedge fund-like strategies and more than $8 billion in a range of private equity vehicles, such as distressed situations.
Bridwell is a managing director and global head of alternatives product development based in Newport head office. She oversees the design, launch and marketing of hedge funds and private equity offerings. She also heads up mortgage and asset-backed securities product management, which was her background before joining PIMCO.
On her first visit to Australia last week, Bridwell said that investors were looking for yield everywhere – as in Australia – and they realize that if they need income and yield they have to “do more and more” to get it.
However, unlike Australia, there is also a massive trend to take up liquid alternatives in the retail space in the US. So much so, Bridwell says, that a good amount of her time is now devoted to explaining to new investors the different types of alternatives and their attributes.
“In the US, retail alternatives is almost a mania,” she said. “We know they have attractive diversification benefits but they don’t always offer higher returns. Our challenge is to make sure investors know what they can and cannot do.”
PIMCO has always adopted a collegiate approach with its clients, pumping out thought leadership papers and occasionally handing out advice to the Fed too, via its client and media messaging. “We try to help our clients to generate less correlated returns,” Bridwell says. “They, hopefully, think of us as a thoughtful partner… There’s a difference between this approach and, say, that of a boutique hedge fund manager. We also partner with consultants to help tailor strategies.”
There has been a resurgence of interest in the US recently in mortgage-backed securities known as “non-agency loans” (because they are not provided by government agencies such as Fannie Mae, where Bridwell used to work). These look scarily like the sub-prime products which caused so much grief in 2007-2008, but Bridwell says it will be very difficult for a bubble to reform in the US mortgage sector.
“The provision of credit is nowhere near where it was prior to the crisis,” she says. “We don’t have aggressive lending from the banks.”
She says the banks have big contingent liabilities and don’t want to take on anything approaching additional risk. PIMCO, too, is less bullish than most on the US housing recovery, predicting growth of 3-4 per cent a year over the next couple of years compared with consensus of 4-5 per cent, because of the credit constraints.
She also says that some other markets may be showing “some froth” or are fairly priced, but there are no signs of a bubble. There are still pockets of “dysfunction” which alternative managers like so much. Bridwell points out that PIMCO was one of the first fund managers to start to raise the red flag about structured credit in the early part of 2007.
While liquidity is more important to investors since the crisis – in Australia helped along by APRA guidelines forcing super funds to take note of liquidity – Bridwell advises long-term investors to “thoughtfully sacrifice liquidity as much as you can”.
She says: “The banks are still downsizing their balance sheets. The global financial institutions universe is still shrinking and the returns which the banks would have taken are now available to the rest of us.”
Illiquidity provides a premium and at the end of the day, Bridwell says, “performance is the ultimate judge of credibility”.