These days, it’s no fun being a bond manager

SAN FRANCISCO — A top bond expert made only passing mention of bonds at TD Ameritrade Holding Corp.’s 2007 annual conference in San Diego early this month. Paul McCulley, a managing director at Pacific Investment Management Co. in Newport Beach, Calif., delivered a speech that focused mainly on the global economy and seemed to leave many financial advisers scratching their heads. “He just seemed to say we would muddle along,” said Reginald Tilley, senior financial adviser for Appropriate Balance Financial Services Inc. of Bellevue, Wash., who admitted that he missed a portion of Mr. McCulley’s remarks because of a telephone call. The firm manages $350 million. Mr. McCulley wasn’t available to comment on his speech by press time. But it isn’t surprising that a managing director at Pimco, one of the world’s largest bond managers, would have little to say about fixed income these days, according to fellow bond managers. “There are few opportunities to make bets on bonds,” said Eric Leve, who oversees fixed-income investing as senior vice president of Bailard Inc. in Foster City, Calif. “It’s a tough time to be a bond guy.” That is especially true for managers — such as Pimco — that aim to generate higher returns by exploiting the difference in bond spreads based on duration and credit quality, said Don Peters, principal of Wichita, Kan.-based Central Plains Advisors Inc. The firm manages $30 million in bond assets. “It’s frustrating to someone who manages bonds that way, and it’ll stay that way until there’s some kind of default or a hedge fund goes by the wayside and everyone gets on the same side of a trade,” Mr. Peters said. Indeed, Mr. McCulley made no attempt to mask his frustration. “It’s hard to make money, and you see that in my business,” he said. “What’s the pickup [in yield] going out the yield curve? What’s the pickup of owning corporate bonds?” Mr. McCulley asked. In bond lingo, a “pickup” refers to the value gained in a bond swap for which the bond purchased has a higher yield than the bond sold. Net inflows at Pimco totaled $6.4 billion last year, a 70.5% drop from $21.7 billion in 2005, according to Financial Research Corp. of Boston. Pimco’s problems finding pickup may be exacerbated by hedge funds, which are beating it at its own game, Mr. Peters said. By also betting on yield differences, or spreads, hedge funds are thought to be responsible for making those spreads razor thin. Making matters worse, hedge funds actually may have an edge in the game, Mr. Peters added. “These hedge funds are playing the game the way Pimco played the game, but they are playing with leverage. They can come up with a better return,” Mr. Peters said. “It does feel like the market is mispricing risk,” said Mr. Leve, whose company manages more than $1.7 billion overall. The actions of hedge funds can lead to risk mispricing, because of their short investing horizon, said Derek Jaskulski, strategic analyst with Portland (Maine) Global Advisors LLC, which manages $180 million. “A hedge fund lives quarter to quarter, so it’ll buy the junkiest junk,” he said. Two ways that investors may generate superior returns is by investing in large-capitalization stocks and those of emerging countries, Mr. McCulley told the conference attendees. But though this advice may seem unusual from a bond manager, Pimco may yet prove its worth, Mr. Leve said. “The guy who can step aside when the corporate yield backs up [1 or 2 percentage points] is going to look good,” he said. Currently, Pimco is shunning corporate bonds in its Total Re- turn Fund (PTTRX), in favor of mortgage-backed securities, accord- ing to a Pimco marketing account manager who was manning a booth at the conference of Omaha, Neb.-based TD Ameritrade. Brooke Southall can be reached at bsouthall@crain.com. “It’s hard to make money, and you see that in my business.” Paul McCulley Managing director Pacific Investment Management Co.