Word Is Bond
ASK THE BUY SIDE
With more than $590 billion in assets under management, Pimco has little need for black-box trading. Instead, according to Mark Kiesel, executive vice president, generalist portfolio manager, the firm prefers a more hands-on approach when it comes to planning and executing deals. That said, the 36-year-old Michigan native is hardly a Luddite. Waters chatted with Kiesel about his views on homegrown technology, the evolving global market and what keeps him busy 24 hours a day.
Waters: Does Pimco rely on tools from the sell side or are its tools primarily built in-house?
Mark Kiesel:
It has been our philosophy since our founding 35 years ago that our technology would be developed in-house.Waters: Has this offered advantages—like not being beholden to the sell side?
Kiesel:
Yes, particularly in the mortgage market, but also in the derivative markets, treasury futures, options and the credit default market. All of our technology across the markets is proprietary. It's definitely a competitive edge.Waters: Which trading tools are you using?
Kiesel:
MarketAxess, TradeWeb, and Bloomberg—we use them all. Different desks at Pimco use different systems. The corporate desk, for which I am responsible, uses all of them. I have all three on my desk right now.Waters: Do you use one system more than others?
Kiesel:
We use a combination of the systems because we like having that flexibility. Over time, we might come up with a preference but right now we like the competition. Everyone is trained on all the platforms so whatever provides the best execution and lowest prices is the one that we're going to use.Waters: In the bond market, are deals primarily made over the phone?
Kiesel:
Not with secondary trading. This has moved to online systems.Waters: Is latency an issue?
Kiesel:
No, these online systems are incredibly quick. You can get bids and offers back in two minutes and usually from 10 or more dealers. It's very efficient and very quick.Waters: How much is done over instant messaging?
Kiesel:
We have IM on Bloomberg. We use Open Bloomberg, which is useful to us.Waters: Do you envy the brokers who use algorithmic trading tools in equities?
Kiesel:
No; we tend to be more fundamentally driven here. We have a top-down systematic investment process and philosophy, as well as a disciplined bottom-up security selection based on thorough analysis of the industry. We have 25 analysts all over the globe who are following these sectors. We are what you would call the opposite of black box.Waters: Do you feel that you are missing anything by not using black-box trading?
Kiesel:
No, I think our long-term performance record speaks for itself. Knock on wood, just because we have had success does not mean that we are complacent. We are always searching for value for our clients. This gets back to the longer term—our three-to-five-year secular approach. We tend to look out further than most managers to try to anticipate secular trends in the global economy, which then impact interest rates, spreads, volatility, and so on. That's how we derive our top-down value combined with the more bottom-up process, which is really coming from the credit selection all over the globe.Waters: What do you mean by secular?
Kiesel:
Secular is more of a three-to-five-year trend that is independent of business cycles. With business cycles, you tend to have recessions, growth spurts and monetary policy, which counteract the business cycle. A secular trend is a longer-term approach. An example is the industrialization of emerging markets, the globalization of the work force and aging of the population. These are secular trends that have significant implications for interest rates, inflation and economic growth. We hopefully do a good job of anticipating these big-picture changes in interest rates, credit trends, volatility, sector rotation and so forth.Waters: Do you use specific software for this?
Kiesel:
The secular trends are more "big picture" and technology is not something that helps us to anticipate these trends.Waters: How are credit default swaps processed?
Kiesel:
The trade occurs and the back office confirms the trade and then it generates a written confirmation and creates a document that has to be signed. The final steps are the signatures on the actual documents. CDSes are over-the-counter and are governed by the International Swaps and Derivatives Association, so with all that comes a lot of documentation and standardization. There has been a huge effort made by the dealer community to speed up the confirmation process.Waters: Transparency has increased in the bond market. Has it helped the competition more than it has helped Pimco?
Kiesel:
No, I wouldn't say so. I think there is transparency, but ultimately, dealers want to deal with large investors. They want to see where the large flows are going. Think about it: Is Goldman Sachs or Morgan Stanley going to care what we do? We are rounding errors to them.Waters: How much does compliance play a role in your business day?
Kiesel:
Obviously, Pimco is focused on compliance. We have a chief legal officer and a chief compliance officer.Waters: If the prosperity of the 1990s returned, would the obsession with compliance fade?
Kiesel:
No, I think New York Attorney General Eliot Spitzer has changed the world and every firm is focused on compliance.Waters: Do regulators have a realistic view of what technology can accomplish?
Kiesel:
I think it's a matter of a firm's character—the people in the firm, the leadership. Character and integrity set cultures and firms apart. Also, how it is prioritized within the firm is important.Waters: Has technology changed global operations?
Kiesel:
Quite honestly, the technology means that I work longer hours. I go to bed at 9 p.m. and I am up by 4 a.m. The technology means that I am reading e-mail around the clock. The only time I am not in touch with the markets is when I am sleeping. And sometimes even when I am sleeping, I am thinking about the markets.The technology has made information more available and accessible 24 hours a day, but it also means that we are working more. I have a BlackBerry and Open Bloomberg, so I can get market info regardless of where I am in the world. The Open Bloomberg allows any PC with Internet access to get the information.
Waters: Do you have a technology wish list?
Kiesel:
I would embrace any new technology. I would like the ability to get the CNBC TV channel on my cell phone. Unfortunately, there's no technology out there to lower the golf handicap—that would be my first technology preference.RESUME IN A BOX Name: Mark Kiesel |
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