Taking the Long View

Living through East Germany’s collapse makes Pimco’s Thomas Kressin — who has beaten 98 percent of peer bond funds — skeptical about the euro’s outlook.



Thomas Kressin


• Invests in corporates, sovereigns and currencies.

• Uses Pimco’s outlook as a filter for his portfolio management.

• Avoids trading in and out because of short-term signals.

THOMAS KRESSIN HAS RACKED UP BIG MONEY for his bond fund investors. Helping him chalk up the performance, he says, is an experience from decades ago: growing up behind the Iron Curtain.

The global bond manager and foreign-exchange specialist at Pacific Investment Management Co. in Munich was born and raised in Oranienburg, a city 35 kilometers (22 miles) from Germany’s capital. He was 16 years old when the Berlin Wall fell in 1989. “My upbringing in former East Germany has a tremendous influence on my work,” Kressin, 39, says. “I think it is even more important in the current environment of what is going on in Europe.”

Having seen the East German system collapse in weeks made him sensitive to vulnerabilities in the euro, Kressin says. So when fissures appeared in the monetary union, he moved to protect investors’ money. “For our clients, a valuable investment decision was to have realized very early in 2009 that we don’t only have a small Greece problem in Europe, but a deeper institutional problem in terms of the construction of the monetary union,” he says. Kressin, who manages $7 billion in funds and separate accounts that invest in bonds and currencies, moved money away from peripheral Europe and into safer assets such as Scandinavian covered bonds.

Those moves have paid off. Kressin’s 360 million euro ($450 million) Allianz Pimco Internationaler Rentenfonds, which invests in corporate bonds, sovereign debt and currencies in both developed and emerging markets, returned 18 percent in the 12 months ended on June 11. That gain beat 98 percent of peer funds, according to data compiled by Bloomberg. By comparison, a Bloomberg active index of European global debt funds lost 8 percent during the period.

PIMCO’S ANNUAL MEETING to discuss major trends in the coming three to five years is a key part of how Kressin chooses investments. Pimco was founded by Bill Gross, who manages the world’s largest mutual fund, the $261 billion Pimco Total Return Fund. The firm is now a unit of Munich-based insurer Allianz SE. Each May, Kressin and other Pimco managers gather for three days at the firm’s Newport Beach, California, headquarters to discuss the world outlook and to listen to outside speakers who have been invited to challenge the firm’s view, he says. Among the findings of the most recent meeting were forecasts of slower growth around the world and the expectation that the euro zone could not remain intact in its current form during the coming three to five years. One higher-probability scenario, according to the firm, is a smaller monetary union that would likely include the four biggest current members — France, Germany, Italy and Spain — in a closer political union.

Kressin says that the Pimco world view acts as a filter for his portfolio management. Fund managers are bombarded with information, he says, and face the risk of losing money by trading in and out of investments because of news or other short-term signals. For example, Kressin says, a manager could easily have cut defensive positions because of news in early June that Europe would provide a €100 billion bailout for Spain’s banks. “Was it good news? Probably, in the very short term it was, but you have to look at the long-term consequences, too,” Kressin says. “Has it really changed our view regarding the development of the euro-area crisis?”

During the European debt crisis, Kressin has invested in the U.S. dollar, the Japanese yen, German bunds and Scandinavian and German covered bonds as well as in emerging markets, including Mexican government bonds and Brazilian and Asian corporate bonds. He is underweight the euro, he says. Among the fund’s holdings this year were zero-coupon, three-month Japan Treasury bills that yielded 0.1 percent at issuance. The yen-denominated debt offered a way to benefit from moves in the Japanese currency, which strengthened 17 percent against the euro in the 12 months ended on June 11.

Kressin says that in 2009, Pimco determined that the old framework that everyone used to base their decision making on — a world of leveraging — had ended with the collapse of Lehman Brothers Holdings Inc. the previous year. The “new normal” was a completely different macroeconomic environment. “You cannot use the old tools and models anymore; you must have a different approach,” he says.

AS PART OF THE NEW TACK, KRESSIN SAYS, Pimco now has more people in Europe who are dedicated to doing credit research on sovereigns. That’s a role that didn’t exist as a separate function a few years ago, he says. Credit research was something you used to do on companies or emerging markets, not on developed countries. “All of a sudden, you lost your risk-free asset,” Kressin says. “Your risk-free asset isn’t risk free anymore.”

Because of the economic problems in the U.S. and the U.K. and the debt burden of Japan, Kressin’s investment approach to currencies has also changed, he says. “The difficulty with currencies is that now it has become an ugly contest rather than a beauty contest,” he says.

In Europe, Kressin says, everyone knew that the currency union was flawed from the beginning. Because policy makers took a fix-it-later approach, a project created with the best of intentions to unite Europe may end up dividing it instead, he says. “That’s what I am most concerned about at this moment in time — and that’s what you see across Europe,” Kressin says.

As a former East German, Kressin says he’s always wary of politicians with grand ambitions. “Great visions always led us into these turbulent times, unfortunately.”

NIKLAS MAGNUSSON IS CHIEF OF THE HAMBURG BUREAU OF BLOOMBERG NEWS. This email address is being protected from spambots. You need JavaScript enabled to view it.


Type CRIS EU <Go> to use the Crisis Monitor function to display data related to the euro crisis.


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