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Sandro Pierri, Pioneer Investments, interview

02 December 2013


Alastair O’Dell speaks to Pioneer Investments chief executive Sandro Pierri about making money from fixed income in a rising rate environment

Read more: Sandro Pierri Pioneer Investments fixed-income

Sandro Pierri took over the role of Pioneer Investments chief executive from Roger Yates in July 2012, and with it the responsibility to implement a five-year plan. As he was involved in devising the plan, Pierri did not feel the need to make any major changes and so was 18 months into the implementation phase when he spoke to Global Investor/ISF.

Parent firm UniCredit thoroughly considered the future of Pioneer in 2010, getting as far as talking to potential suitors, but ultimately decided the best option was to invest and grow the business. The final decision was taken in April 2011 and Yates was charged with creating a five-year plan over the summer. UniCredit backed the plan with significant investment and the results are now starting to appear.

The business sources roughly 50% of its assets under management (AuM) via UniCredit’s distribution channels, including its private bank and Fineco independent financial advice business, but this share is heading towards 40%, in line with the plan, as more business is flowing in from external sources.

At the end of Q3, Pioneer had around €7.5bn ($10bn) net new flows year on year, which are "pretty significant numbers" and ahead of schedule. "It is good to start with the right momentum," says Pierri, adding that it is flowing from a wide geographic mix of countries, institutional as well as retail sales, and includes a pick-up in equities to complement its predominantly fixed income business. "It is not only about the numbers – it is also about the quality of the flows." 


 


The five year plan
While the bulk of the five-year plan remains intact, Pierri’s style is different and is perhaps more in tune with the task in hand. "I am obsessed by execution. I think it is really the differentiating factor. But we really were very much in alignment in the three years we worked together."

Due to the plan’s long timeframe, some adaptation to circumstances was necessary. "Our GEM [global emerging markets] and global equities capabilities have enough traction. But I wanted to make sure we avoid huge investments upfront and then just hope for a hockeystick effect [investing now and hoping the business will take off later]. I wanted to have a more gradual build-out."

He also wanted more focus on maximising fixed income opportunities. "I felt that fixed income is going to be an important development, given it is a large pool of assets and it will stay there. I wanted the team to refocus a bit more on the institutional channels because that is where we have the largest fixed income pool. It is the best match with our investment credentials."

The end of QE
The key issue for all fixed income asset managers is the tapering of quantitative easing (QE) and the return to normal interest rates. As the US Federal Reserve rate is the de facto global risk-free rate, any increase will have a knock-on effect globally for government and corporate bonds. Pioneer does not expect rates to rise in 2014 but knows this will happen at some point.

"The challenge is how orderly this transition will be. If it is orderly, it is going to be longer-term and something that will create opportunities along the way. If it is not, it could be a significant challenge. The risk is that there is a complete misalignment between investor perception and reality about the safety of fixed income returns."

Everything will depend on the deftness of institutions such as the Fed in managing perceptions. "Clearly, it is mostly about communication. No one doubts that interest rates will at least definitely not fall again. The Fed tested the water in June but made a much more benign comment in September. They are trying to manage this transition in a reasonably orderly way, which is encouraging."

Fixed income challenges
The predominance of fixed income in its business could be seen as a strategic difficulty, but Pierri does not think that tapering will cause an exodus from the asset class. While he believes equity valuations are more attractive than those for fixed income, he believes hype surrounding the great rotation is overdone.

"On the institutional side, you still have liability-matching portfolios so fixed income will still be a relevant part." He notes, for example, that Solvency II pushes insurance companies in Europe towards fixed income by penalising riskier assets.

"The fact is that the fixed income pool of assets is so large that it will not go away. We can do a better job than just advising clients to go into equities, which they will never do."

He also notes that demographics are working in the other direction as, on the retail side, there is a concentration of investors approaching retirement and it is "difficult to believe that they would aggressively walk away from fixed income".

But the returns created by even the most astute strategy could quickly be wiped out by swimming against the tide of rising rates. He says that two elements are crucial to combat this.

"Clearly, you have higher risk." He says the riskiest part of the fixed income spectrum – high yield and emerging market debt – will probably offer good value and yield pickup. "Fixed income investors need to be prepared to take more risk than plain sovereign or investment grade bonds," he warns. "It’s going to be difficult."

The second element is structural. "You need to be in a position to allocate between the different sectors of fixed income over time in a reasonably aggressive way. Even on sovereign, even with a rising interest rate, there will be tactical moments when it probably makes sense to allocate.

"The issue is how to prepare your fixed income offering, starting with lowyield, for a potentially long period of rising interest rates. Flexibility in allocation is of paramount importance. It needs to be done within a very disciplined risk framework."

Pioneer has approximately 24 dedicated analysts in its US and European fixed income teams, with specialists in currency, interest rates, loans and infrastructure among other areas. "Outside the plain vanilla toolkit, you need the right resources to spot opportunities."

But, for now, Pierri is seeing only "incremental flows into equities" where new cash is being deployed rather than leaving fixed income. "Clearly, the hot days of the past five years are slowing down," he says, but this means only that investor preferences are shifting towards unconstrained, multi-sector, fixed income products.

The role of multi-asset
Investment has become much more benchmark agnostic, he says. "It is really about how you can protect clients’ money rather than replicating an index." One method is the unconstrained approach – an absolute return fund potentially spread across several asset classes – with a series of uncorrelated alpha sources.

He suggests the new key ability is to allocate among different asset classes. He says it is better to trust firms with multiasset products, of which Pioneer is one, that can quickly adapt asset allocation in response to market events. "That is what is really behind the growth in multi-asset, solution-based products," he says.

He says that in the US almost 60% of Pioneer’s flows are into multi-asset products, "which are ones that we did not have five years ago". He says there is also evidence this is starting to happen in certain European markets. "It is a question of also creating the right package in the right geography. We are well prepared."

The approach includes asset classes such as high-dividend equities, and there are plans progressively to increase the number of asset classes to include loans, infrastructure and real estate. He stresses that these are not the same as balanced funds, fashionable with pension funds in 1990s.

"The real difference is the breadth of underlying asset classes – that is where the game will be played. It is really about how credible each firm is in addressing the less traditional asset classes within a multi-asset framework."

Pierri says middle-tier pension funds are increasingly joining the traditional retail investor base for multi-asset funds due to the cost of effectively monitoring multiple mandates across many asset classes.

Emerging markets
Emerging markets were also a key part of the five-year plan. On the distribution side, Pioneer has a "pretty sizeable" business in the US and is gaining traction in markets such as France, Switzerland and Spain, but has identified emerging markets as crucial to future growth. "We probably have a better chance if we really invest for future growth in the larger emerging markets."

He mentions that Asia and Latin America are his top prospects and notes that lead times are usefully shorter than in crowded developed markets. Pioneer has already started a significant initiative in Mexico, where it has already won a couple of large institutional mandates. It also set up a joint venture with Bank of Baroda, one of India’s largest public banks, in 2008 to distribute its funds.

On the investment side, the plan to make London its emerging markets hub has been completed. It was decided that it was preferable to have the whole team sitting in one place with a consistent investment process and tap into London’s international expertise than have a scattered local presence. "At the end of the day it is a question of whether you have access to the best talent pool."

While still concentrating on the five year plan, he is also considering building up a liquid alternative business, which is becoming a trend in the US and Europe. But this would be an evolutionary, not revolutionary, move as it would be adding to Pioneer’s existing credit and long-short equities offerings in European and Asia.

The next 18 months are about momentum. "We want to see flows because that is the real indication of the health of an asset manager. At the end of Q3 the numbers were very promising. The next step is sustaining and maintaining this momentum."


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