Pointing out that spread compression in the bond market makes it difficult to gain a competitive edge, he says investors should consider rather specialist fixed income and related structured products such as collateralised debt obligations for extra return.
PGI, which has worldwide assets under management totalling $201.3bn (€155.24bn), is looking to specialist fixed income and equity products to drive the growth of its small $4bn European institutional business.
Short-term targets
Although Mr Lyster claims to have beaten the Lehman Global Aggregate index in 22 of the last 24 years, he is concentrating instead on promoting a specialist short-duration fixed income fund which targets Libor plus 300 basis points. The Global Strategic Income fund which was launched in Australia in 2004, utilises the investment capabilities of PGI and two of its US-based subsidiaries, high-yield bond manager Post Advisory Group and preferred securities manager, Spectrum Asset Management.
The $350m fund invests in what Mr Lyster calls a diversified range of lowly-correlated assets, including investment grade corporate debt, interest-only commercial mortgaged-backed securities (CMBS), high yield CMBS, emerging market debt and structured debt.
“CMBS are negatively correlated to high yield and to ABS [asset-backed securities] as well. Put them together and you end up with attractive risk-return capabilities,” he says.
An offshoot product called the Strategic Fixed Income fund, which incorporates a swap on to a seven-year bond, was rolled out six months ago in the European pension fund market.
While the fund is being promoted in Scandinavia, the Netherlands and the UK, Mr Lyster expects the greatest interest to come from institutional investors in Germany where PGI has been busy talking to investment consultants who he says are already familiar with preferred securities, a component part of the Strategic Fixed Income fund.
Going forward, he expects to win the most fixed income mandates in Germany, the greatest number of equity mandates in the UK and a blend of fixed income, equities and real estate in Scandinavia and the Netherlands.
He says high yield bond mandates have sold well in Scandinavia and the Netherlands. PGI’s high yield fund outperformed the Lehman High Yield index in 2006 to claim third place in a universe of 48 funds according to Standard and Poor’s. Not so the firm’s preferred securities fund which, shows S&P, has significantly underperformed the Lehman Global Aggregate index over a one and three-year period to late January.
Mr Lyster acknowledges that performance was “a bit choppy” last year.
“The trade association of the US insurance companies was concerned whether these preferred securities should be considered as bonds and said they might re-rate them as equity assets. That caused a climate of uncertainty amid speculation that the whole preferred securities market would be re-rated,” he says.
Succeeding globally
The firm has fared much better in global equities, returning 46.49 per cent in the three years to 22 January, against the 37.68 per cent posted by the S&P Global 1200 index.
On the structured product front, PGI has just launched a long-short credit CDO strategy into Europe. At end-2006, the firm managed assets worth $2.2bn in CDOs for institutional investors worldwide.
While US-based PGI manages money for institutional investors in Scandinavia, France, the Netherlands, Germany and the UK, it is channelling extra resources into developing the latter two markets.
In January, the sales team at the Munich office was expanded with the recruitment of Christian Humlach from UBS Asset Management. He will be responsible for building relationships with fund of funds managers, asset managers, private banking and wealth management and family offices.
Mr Lyster has also been busy beefing up the personnel in the London office. Last October four new appointments were announced – Ivan Petej, a currency portfolio construction and risk analyst, Tammy Belshaw an emerging markets research analyst, Jonathan Mathews, an equity research analyst and Vicki James,a client services manager. Further front-office staff hires are anticipated during 2007.
He explains that over the last two years, PGI was not concentrating on the UK institutional market because it believed that the greater demand for its specialist fixed income products was in continental Europe. He observes, however, that most UK pension funds award aggregate bond mandates which offer scope for introducing some specialist debt instruments around a gilt core.
“Now that our global equity and global emerging market equity funds are performing well, we feel the time is right to start focusing on the UK market. We hired Steve Holt as head of UK institutional sales last July to spearhead that thrust,” says Mr Lyster.
He adds that it is not PGI’s intention to build “an empire” in the UK “just for the sake of it”. The London office currently manages assets totalling $10bn.
“That is why we are hiring front-office people who can create value”, he says.
In addition to global equity and global emerging market equity, PGI will be promoting its currency management capability to larger UK pension plans which tend to hire multiple managers.
“It is typically an overlay absolute return strategy, but increasingly UK pension schemes are allocating money to a currency fund,” notes Mr Lyster.
He hopes also to win UK pension funds over to PGI’s US real estate investment capabilities. Not surprisingly, given the firm’s presence in 60 metropolitan property markets in the US, Mr Lyster is keen to talk up the investment return potential there.
Taking a property punt
European pension funds, he adds can take a punt on US property, via an investment fund, which was seeded recently by a large Dutch retirement scheme. PGI manages real estate assets totalling $38.5bn.
Sub-advisory investment mandates form a growing part of PGI’s business. In November, the firm was awarded a $340m sub-advisory mandate by Sanlam Asset Management (Ireland) for a global equity fund which is part of the multi-manager range of Sanlam’s Dublin-domiciled Universal Funds range.
It was the first large segregated equity mandate that PGI Europe was awarded since it started pitching for global equity briefs from UK and Irish institutional investors late last year.
This was followed in January by another sub-advisory mandate awarded to Post Advisory Group to run a US high-yield fixed income sub-fund (initially $70m) for Danish-based Gudme Raaschou Asset Management.
The Sanlam mandate is being run on PGI’s quantitative research platform which was developed five years ago.
Mr Lyster claims the platform is more than a stock-screening tool and allows PGI to review and analyse up to 10,000 stocks globally and rank them. That review and ranking process is then used to allocate work to the traditional buy-side analysts who confirm and interpret those rankings and make recommendations to the portfolio manager.
He maintains that unless you are a totally unconstrained investor, it is very difficult to manage money without a quant process. He claims that more and more consultants and institutional investors are looking to quant research processes “because there is just so much information out there”.
While reluctant to talk about asset growth targets, Mr Lyster is “absolutely confident” that the firm is going to grow strongly over the next two years at least on the equities side. He concedes there is work to be done to improve the performance of fixed income products such as high yield and preferred securities.
His main challenge going forward is to produce products that provide “sustainable alpha”. Emphasising that PGI will remain solely as a manufacturer of investment products, the aim, is to build lasting relationships with distributors such as fund platforms, multi-managers and consultants who help channel products to such outlets.
