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PIMCO’s El-Erian Handles $7 Billion; Dodged Argentina

PIMCO’s El-Erian Handles $7 Billion; Dodged Argentina

By RAJIV VYAS





Not long ago, Mohamed El-Erian was big on Argentina.

In early 2000, the bond fund manager for Newport Beach-based Pacific Investment Management Co. counted $2 billion in Argentine bonds,or about a third of his funds under management.

Argentina’s economic reforms and heady growth of the early 1990s put it on course to catch up with the developed world, El-Erian figured.

“Argentina used to be a very well run economy,” said El-Erian, a managing director at PIMCO. “Then two things happened: the government started running huge deficits, and the economic climate changed.”

That was enough for El-Erian. He got out of Argentine bonds,nearly two years before Argentina’s December financial collapse and debt default.

El-Erian said he became wary of Argentina’s long recession and increasing debt. In Buenos Aires, the political will to carry on with difficult fiscal policies was fading, he concluded.

“We sold Argentina early on because they simply didn’t have the instruments to implement the economic reforms,” he said.

The story shows how El-Erian has been able to parlay his early experience with the International Monetary Fund into a career at PIMCO, part of Germany’s Allianz AG and the top bond manager with $240 billion under management.

“Mohamed has a gift for seeing things that others don’t,” said William S. Thompson, PIMCO’s chief executive. “He not only sees the forest, but he also knows the type, height, width and all the termites in every tree in that forest too.”

El-Erian manages about $160 million in the Emerging Market Bond Fund, a mutual fund, and another $6.6 billion for institutional clients. As a PIMCO managing director, El-Erian sits on the company’s investment committee alongside bond guru Bill Gross. He also is a senior member of PIMCO’s portfolio management and investment strategy group.

Avoiding the Argentina flameout helped make El-Erian’s emerging market fund the best performing bond fund last year with a 28% gain after fees. The fund’s benchmark, the J.P. Morgan Emerging Market Bond index, fell by about 1% in 2001.

El-Erian’s fund has beaten the index in every quarter for the three years that the New York-born Egyptian has managed it. In the past three years, the J.P. Morgan index saw an annualized gain of 13.08%, vs. 23% for PIMCO’s emerging market fund after fees.

“We have had three good years,” El-Erian said. “Not only have we returned more than the index, but we have done it with less volatility.”

PIMCO mainly invests in government bonds in emerging markets and little in the way of corporate debt. In 2001, El-Erian’s fund was ranked No.1 in its group by Lipper Analytics, a fund tracker that’s part of Reuters Group PLC.

Not bad for someone in his first stint as a bond fund manager. El-Erian joined PIMCO from Salomon Smith Barney Holdings Inc. in London, where he had headed up economic research since 1997. He spent most of his career, 14 years, with the IMF, the 183-nation lending agency.

“I went to the IMF in August of 1983 thinking that I would be there for couple of years,” El-Erian said. “I loved the place.”

El-Erian, whose father was an Egyptian ambassador to France and whose mother is French, started at the IMF in the agency’s economist program, training grounds for new entrants. By the time El-Erian left, he was deputy director,the second highest ranking staff position.

“I was the youngest deputy director at that time,” said El-Erian, 43.

El-Erian said he honed some of his skills analyzing emerging markets at the IMF, where he was involved with programs in Latin America, Asia, Africa and Eastern Europe. While at the IMF, El-Erian was involved in talks with Mexico during its 1987 debt crisis.

“IMF is a great place,” he said. “You go in and you are sent to various countries, which exposes you to various policy makers. That has helped a lot when it comes to investing in bonds.”

PIMCO approached El-Erian through a headhunter in late 1998 for a job at its Newport Beach headquarters.

“I interviewed on three separate occasions,” he said. “Someone said to me at that time that even if 1% of PIMCO rubs off on you, you would have doubled your human capital.”

El-Erian said he joined PIMCO without much hesitation in May 1999. He was hired as an executive vice president.

By the end of 1999, El-Erian was promoted to managing director, the highest level a portfolio manager can reach at PIMCO.

“It’s a very well run company that forces you all the time to think about what you are doing,” he said.

It isn’t easy, though. El-Erian said he gets up everyday at 3:15 a.m. and is in the office an hour later.

By 6 a.m., El-Erian said he has his market outlook summary ready and then is busy on the trading desk until 4 p.m. PIMCO’s investment committee, on which El-Erian sits, meets as often as every day and once a week at the least.

Every other weekend, he said he comes into his office in Fashion Island to do keep track of economic and political issues in emerging markets.

“It’s been a wonderful experience so far, except for waking up at 3:15 in the morning,” he said. “You are continuously challenged by some very smart people.”

Interestingly El-Erian said he wasn’t an economics fan in his early days. He attended school in England where he opted to study mathematics and science. But he said he soon got bored of it.

In England’s rigid education system, he said his only other choice was economics.

“I completely fell in love with it and then I never looked back,” El-Erian said.

El-Erian moved to a boarding school in England after his diplomat father got involved in Middle East peace talks in 1973. After moving around the world, El-Erian said he and his family opted for him to settle in England for his education.

In 1980, El-Erian was awarded his bachelor’s degree in economics from Cambridge University. He went on to Oxford University on a scholarship and got his master’s and doctorate degrees in 1983.

As an Arab-American, El-Erian is unique among bond traders. He said he has felt the fallout of Sept. 11.

“Initially traveling became more difficult,” he said. “Now it is somewhat better, but not back to normal.”

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