US fund manager Trust Company of the West (TCW) hopes to break through the oligopoly in the global fixed-income market by seeking opportunities in markets that are too small for the large firms to trade in.
"There was the perception that the US fixed-income business had been perfected - this was the idea of five years ago," TCW chief investment officer and high-grade fixed-income group managing director Tad Rivelle said.
"But the efficient frontier of fixed-income investing can be extended," he said.
The global fixed-income market is dominated by three managers, PIMCO, BlackRock and Legg Mason, which each have trillions of dollars in funds under management.
But their size has also caused problems for these firms when it comes to participating in small transactions.
TCW has, for example, been successful in the niche market for airline equipment trust bonds, Rivelle said.
"US airlines have, as you know, a bad habit of going bankrupt," Rivelle said.
"So the fixed-income markets have evolved this structure for providing credit to US airlines, because nobody actually wants to take the counterparty risk. There are bankrupt-remote vehicles that own the airplanes," he says.
Because these vehicles are shielded from the bankruptcy of an airline, fixed-income investors are willing to buy their bonds.
"The bankrupt-remote trust collects lease payments from the airlines and then it passes a portion of these lease payments on to the bond holders," Rivelle said.
These bonds, called enhanced equipment trust certificates, are relatively small in size and a typical transaction would be between US$5 million to US$15 million, Rivelle said.
"Those chunks are so small that a large firm would almost exhaust itself to chew on them," he said. "But it has been one of the very best performers in US fixed income."
Rivelle said there were a number of these niche markets in which mid-sized fixed-income managers had a clear advantage.
He also hopes to reach more clients by leveraging TCW's relationship with the recently created Amundi Asset Management, a union between the asset management operations of TCW's parent company Societe Generale (SocGen) and Credit Agricole.
"We hope to be a very credible competitor against those big three firms," Rivelle said. "We did not have the size or financial resources to do that in the past."
TCW is currently 20 per cent owned by Amundi, while the remainder is owned by SocGen.
But TCW has recently reached an agreement to have up to 20 per cent of the firm's equity distributed back to TCW's key staff.
This transaction would leave SocGen with a stake of approximately 64 per cent in the firm and Amundi with 16 per cent, a spokesperson for TCW said.
