Matthew Smith in New York - 01 Nov 2007
Pimco, the bond fund manager that is part of German insurer Allianz, has bought more than $5bn (€3.5bn) in mortgage-backed securities, indicating the manager believes price declines on the assets may have bottomed out, ahead of the launch of its distressed fund.
Speaking to Financial News last week, Bill Gross, Pimco chief investment officer, said he would buy up to an additional $2bn of the the securities in the coming weeks.
The fund has bought asset-backed securities based on prime, Alt-A and sub-prime mortgages in recent months.
It has been taking advantage of liquidations by a number of structure investment vehicles that have been forced to reduce their leverage.
The majority of the securities bought by Pimco were originated in the parts of the US where home-owners have been hardest hit by defaults, particularly in California and Florida.
“We’ve underwritten these very carefully and I’m satisfied we’re not going to lose any money on them,” Gross said.
He criticised US Treasury Secretary Henry Paulson for his role in the creation of the Master Liquidity Enhancement Conduit, known as M-LEC, saying the fund was not in the interest of open market forces.
“Potential buyers like myself wonder why they are not allowing market forces to come into play here. To clear bacteria, you need fresh air,” he said.
The trick to buying the seemingly tainted assets, he said, is to ensure they have sufficient subordination, so the buyer has priority over other future claims on the assets.
He said: “There’s nothing wrong with this asset class as long as it’s priced right, and people who are investors need to have the information in order to price this asset.”
Several other fund managers, including rival bond manager BlackRock, are also looking at raising funds to buy distressed assets.
Speaking about the new fund, Gross said: “We’re not about to jump in the mud pile. There’s a risk with a potentially very significant reward with this fund … Once you weed out the surprises they are very realistic assets.
