The Big Interview: PIMCO’s Blute reveals reasons for calling time on ETF partnership with Invesco

Ended ETF partnership with Invesco in April

Tom Eckett

a man smiling for the picture

Ryan Blute, managing director and head of global wealth management, EMEA, at PIMCO, has said now is the right time to take the ETF range in house a decade after entering the European ETF market in 2010.

Speaking to ETF Stream for the first time since PIMCO ended its ETF partnership with Invesco in April, Blute (pictured) said the US giant is determined to become the “undisputed leader” in active fixed income ETFs in Europe, an area of the market that is still evolving rapidly.

PIMCO’s journey into the European ETF market started when Source, at that time a consortium of banks, was looking to partner with investment managers to build out a diversified platform of ETF strategies.

According to Blute, this was a “low risk” move for the US asset manager and gave them a natural entry point into a market where fixed income ETFs were not yet widely adopted.

However, the situation changed dramatically in 2017 when US rival Invesco snapped-up Source as it made a bid to increase its presence in the European market.

With Invesco fully integrating the Source platform by August 2018, this left PIMCO in an awkward position with one of its main rivals in the US partially responsible for flogging its European ETF range.

So in 2019, the two firms decided to call time on this partnership leaving PIMCO solely responsible for the distribution and servicing of its ETF range. According to data from Morningstar, the suite currently has $9.6bn assets under management (AUM) across nine products, as at the end of Q3.

“We had a successful 10-year partnership with Source and then Invesco, but we were relying on our partners to position our strategies,” Blute commented.

“We are excited to be in control of our own destiny. Nobody is better at discussing PIMCO strategies than PIMCO people.”

Furthermore, he added PIMCO had been increasing its sales force in Europe so the move was a natural extension of this.

“We were already covering the clients who were using our ETFs, so it made sense to better integrate the range.”

In particular, Blute said the UK, Italy and Switzerland are the three key areas in Europe where PIMCO is going to focus. This is primarily because of the big wealth management markets in those regions likely making them bigger adopters of the ETF wrapper.

Europe still proves tougher nut to crack than US ETF providers anticipate

In terms of the structure of the European business, the team in each country will be responsible for the clients in their region instead of having a centralised office.

This, Blute said, will enable each country to sell both PIMCO’s mutual fund and ETF ranges simultaneously.

“When we look at those regions, those are the three biggest and have the most potential for further growth.”

“We are vehicle agnostic,” he continued. “When we talk to our clients, we want to focus on the underlying investment strategy and the outcomes they need.”

ETF range

Despite being vehicle agnostic, Blute said the firm would not be delving into the world of passives anytime soon adding investors would need to look elsewhere for pure passive building blocks.

“If investors want a government bond index then they are probably not getting the most out of PIMCO as they will be missing out on the alpha engine we can offer.

“We are not going to be the Walmart of ETFs,” he added.

The asset manager’s $9.6bn European ETF range is made-up of six active ETFs and three of what PIMCO label “smarter” passive ETFs.

The “smarter” passive ETFs are in areas such as high yield and emerging markets where there is higher beta and are markets where investors use ETFs as trading vehicles to make quick decisions.

The reason why they are “smarter”, Blute said, is because there is a big emphasis on index selection and design.

For example, the PIMCO US Short-Term High Yield Corporate Bond Index UCITS ETF (STHY) varies from other 1-5 year indices which become forced sellers when a bond has one year of maturity left. With STHY, the index is designed to remove this friction so it can reach full maturity.

Furthermore, he added the range leverages the firm’s credit research team’s views on the market and when there is a real concern about the "credit worthiness" of a company, they exclude it from the ETF.

Somewhat interestingly, Blute said the intraday liquidity that ETFs offer was not something that investors in Europe were highlighting as a reason for using ETFs.

“Investors have not taken advantage of that vehicle feature in our experience as they have been investors from a long-term perspective.”

However, where PIMCO are really going to focus its efforts, Blute stressed, was on the active ETF side.

Fixed income is totally different to equities in that investors can take advantage of the fact not all bond investors such as central banks are investing for total return.”

In particular, the firm is eyeing up ESG space as a potential area where it can use its fixed income expertise. Instead of launching broad products like on the mutual fund side, Blute said launches in this area would be far more targeted.

He also pointed to PIMCO’s StocksPLUS products as another strategy that could be wrapped in the ETF format.

Instead of buying an equity index, StocksPLUS invests in futures contracts of that index which requires only 5-10% of the cash equivalent to be exchanged meaning PIMCO can use that remaining cash to invest in a diversified “enhanced cash” portfolio meaning it should outperform the equity index on a consistent basis.

“It is a way we can differentiate ourselves from the rest of the European ETF market,” Blute added.

For there to be accelerated growth in the active ETF space, however, Blute said certain regulatory constraints needed to change.

Non-transparent ETFs are yet to be given the green light by the Central Bank of Ireland and other European regulators despite developments across other countries in recent times.

Non-transparent ETF discussion takes back seat in Europe

Last year, for example, the Securities and Exchange Commission (SEC) made this regulatory change which enabled a string of ETFs to be launched.

“We want to be the undisputed leader of active fixed income investing in the ETF vehicle however there are certain regulatory constraints that need to change in order to fulfil that.

“There are some regions such as Canada where we have non-transparent ETFs and they been very successful,” he continued. “We have discussed this area with a variety of regulators and industry associations as we want to make sure all involved parties are knowledgeable on the topic.”

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