Russian bonds
Interview: PIMCO --- El-Erian, Mohamed--- Fund Manager
>> welcome back. repeat events in russia including the incarceration of the yukos c.e.o. have given foreign investors reason to pause when it comes to investing in russia. while these concerns may put pressure on russian’s economy and sovereign debt, our next guest recently started buying more russian bonds should by the government, sovereign bonds as they’re called. he manages $12 billion in assets at pimco. he is the manager of the pimco emerging markets bond fund. that bond is up 87% in the past 12 months. average annual return for five years. that puts you in the 99th percent tile, am i correct?
>> i think so.
>> excellent performance. that speaks for itself. let’s talk about russia. it’s obviously more tricky. why are you buying russian debt? you appear to be unphased by the situation that is happening, the arrest of the former yukos c.e.o.
>> absolutely. when the arrest happened, the markets across the board in russia sold off. but we believe two things. one is that the yukos’ affairs are ice hraeutded. it doesn’t represent a retracement of the progress that has been made. the market didn’t distinguish between sovereign risk, risk associated with the government which continues to build up large international reserves, and corporate risk which has more aspects of corporate governance and a rule of law associated with them. there is a fundamental distinguishing between corporate risk and market risk.the market didn’t distinguish between that.%
>> you talked to one of our producers about the cult of personality running the country or at least influencing investment decisions and you have a concern with that rather than so to speak institutions actually running the country. can you simplify that for me please? >> sure. one of the facts of life of emerging markets is that institutions are not strong enough. they’re still developing. what tends to happen is personalities emerge. this cult of personality means a conflict between two people can start impacting institution. that is what has happened really in yukos. it is a political conflict that is being reflected in a corporate issue.
>> do you travel to russia yourself personally?
>> yes, i do.
>> when was the last time you were there?
>> about six months ago.
>> when you are on a trip like this as one of the largest institutional bondholders, who do you meet with and how do you actually gauge the geopolitical situation in the country that has 13 time zones?
>> we meet with three types of people. first we meet with government officials. we are interested to know what other policy intentions, how they’re going to react. we also meet with business leaders to get a feel of how the business is viewing the government policy. thirdly, we meet with analysts. we meet with consultants and meet with the media to get an outside view of how things are developing in the country. ultimately what we’re assessing is the ability and willness of the country to pay back creditors.
>> do you meet with president putin? do you have that access?
>> we don’t have that kind of access.
>> what would it take at this point? i believe the largest holding, at least data released publically in your portfolio. the largest single holding is a piece of a russian bond, $1.3 million worth. what would cause you to turn negative on this position or on this country in general?
>> if yukos turned negative. russia should their weekly reserve number today. everybody expected to come down. it went up. simile the currency which would pick up quickly whether there was capital flight has continued to appreciate. we’re at stronger levels than before the announcement of the yukos affair. if the locals themselves are comfortable, we’re also comfortable.
>> we spoke to george soros earlier today. he said the issue was an isolated incident. you agree with that. why do you think this is an isolated case?
>> i think that there is an implicit contract between the oil gods and the government. they’re allowed to operate the way they praeutd as long as they don’t interfere with the political process. what you had was interference with the political process. that is a reaction against him. it’s an isolated affair, not an attack on business as much as it is a reminder of what the implicit contract is.
>> ok. appreciate your insight and information. we look forward to having you back on again. we’ll follow the performance of your fund, your companies and that of russia. portfolio manager of $12 billion at pimco including the pimco emerging market bond fund. well, we’re certainly not done, folks, because more americans are holding onto their jobs. that could mean more money for asia. we’re going to tell you why today’s employment report could benefit companies like sony and honda. stay with us.
