Building Kapstream internationally key priority

Kumar Palghat

06-Aug-2015

By Wouter Klijn

Janus Capital’s first priority following the acquisition of Kapstream is to expand the bond manager’s international footprint, while providing support to bond manager Bill Gross is second, the global investment manager has revealed.

In an exclusive interview with theinstoreport, Janus Capital chief executive Dick Weil says acquiring Kapstream was not simply about adding a team of experienced investment professionals, but also about continuing the success Kapstream has achieved in Australia.

“Candidly, we paid an awful lot of money for this business and we have to keep in mind that we continue the wonderful path that [Kapstream managing director] Kumar [Palghat] has put this business on,” Weil, who was in Australia this week to speak with clients, says.

“It is his highest priority and it is our highest priority; we should be clear about that.”

Yet, he is clear Palghat will also play an instrumental role in ensuring Janus has the proper infrastructure in place to support former PIMCO bond king Gross.

“From my perspective, I now get Kumar’s expert help in building the infrastructure around Bill, which is a terrific step forward for me because, candidly, Kumar is a much better expert at the kind of infrastructure that Bill needs than I will ever be,” he says.

“The job of supporting Bill becomes a lot easier because we now have Kumar and the rest of the Kapstream team’s support.”

Palghat says Kapstream’s model has much in common with the fixed income business of Janus.

“If you think about Kapstream, we have 10 people, we are portfolio managers and we outsource our back office to [Challenger boutique funds management business] Fidante,” he says.

“So when I think of Janus and Bill Gross and his team in Newport Beach, I think of the same thing.

“They are sitting in Newport Beach managing portfolios, while Denver does the back office and does the support.”

Palghat will also help build an investment team around Gross that makes the firm less reliant on the star manager, in much the same way he has done with Kapstream.

“We want a team structure,” Palghat says.

“It took us eight years to build a team [at Kapstream], but it is now pretty strong and even if I would go tomorrow, they would be okay.

“It will take us a few years to build a similar team around Bill.”

Unconstrained bonds

Under the new structure, both Gross and Palghat will run unconstrained bond strategies.

But Gross will run a strategy that targets higher returns and, therefore, will have greater volatility than Kapstream’s existing strategies.

Yet both portfolio managers will have access to each other’s investment ideas.

“The words unconstrained bonds are not necessarily transparent to everybody and within the industry different people use the term slightly differently,” Weil says.

“But when Kumar and Bill Gross talk about unconstrained bonds, they talk about offering a bond product that has very low duration, but uses the investment opportunities in the broader bond market to generate cash plus a significant return.

“In Kumar’s case that is 200 basis points over cash and in Bill’s case it is 400 to 500 over cash.

“Kumar gives Bill ideas about what he is buying and Bill may or may not choose to follow those ideas, but it is good to have that interaction and Kumar is fully aware of all the strategies in Bill’s portfolio.

“It is a nice synergy between them.

“We philosophically believe in having a lead portfolio manager who is accountable for each of the portfolios.

“Very clearly, Bill is in charge and accountable for his more aggressive version of the unconstrained bond strategy and just as clearly Kumar is accountable and in charge of the Kapstream, more conservative unconstrained bond [strategy].”

Weil says he believes unconstrained fixed income strategies will become more important as interest rates rise, first in the United States and further down the track in the rest of the world.

“We’ve been through a long period of time where equities and duration were most often negatively correlated, but in the next segment those things might quite possibly get positively correlated and that may create really strong demand for unconstrained bonds,” he says.

“If you look at any investor, they have a tremendous amount of equity market risk in their asset allocation.

“They have a tremendous amount of rate risk in their asset allocation and those two should be diversified by other, less correlated bets.

“But it is hard to find these other, less correlated bets in liquid, transparent, reasonable fee formats.

“If we are successful in offering these less correlated investments in liquid, transparent and reasonable fee format, then that is a great opportunity and there is a great need for that.”

Joining forces

When Weil joined Janus from PIMCO in 2010, the company was mainly known for its range of equity strategies, but he pushed hard to develop the fixed income business.

After Weil managed to snare former colleague Gross to establish a new fund for Janus, a mutual colleague suggested Palghat, who also previously worked at PIMCO, would fit in nicely with the business.

“Sometime during the fourth quarter of last year, we had another gentlemen who also used to work at PIMCO, [Janus macro fixed income vice president] Billy Rogers, and who now works for Bill Gross at Janus, call me up and he said: ‘You should think about adding Kumar to the team now that Bill Gross is here focusing on unconstrained bonds,’” Weil says.

“So I thought about it and thought it was at least worth exploring.

“I picked up the phone to Kumar and said: ‘I don’t want to upset your apple cart, but if you are interested in a conversation, then let’s see if there is something here that makes sense, because I certainly respect you, trust you and would love to have you as my partner again.’

“Thankfully, Kumar said he would be interested in a conversation.

“So Billy was, I guess, the investment banker on this one.

“I think we have the capacity to create some wonderful synergies for building businesses outside of Australia.

“We hope that by connecting [Kapstream] to another firm with a lot more resources, we can accelerate their growth, particularly outside of Australia.

“They are doing a pretty good job inside Australia without us.”

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