Pimco Plans Asia’s First Inflation-Protected Fund

Pacific Investment Management Co., which runs the world’s biggest bond fund, is planning Asia’s first fund to protect against inflation in the region.

The investment will aim to return 2 percentage points to 3 percentage points more than the average consumer price gains in Singapore and Hong Kong, said Michael Thompson, head of Pimco’s wealth-management group for the region excluding Japan. The company is also preparing an Asian local currency sovereign bond fund and plans to introduce both products in the second quarter, he said.

Assets linked to costs in the economy ballooned to $180.8 billion worldwide as of the end of last year, though there are no Asian inflation-protected products, according to Morningstar Inc. in Chicago. Bill Gross, who runs Pimco’s $288.2 billion Total Return Fund, has said unprecedented central bank stimulus efforts will drive up prices for goods and services.

“Inflation is higher here than the so-called developed world, and it’s likely to be higher going forward,” Thompson said today in an interview at Pimco’s Singapore office. “The challenge for investors is that there isn’t a large pool of easily traded inflation-linked bonds. We’ve done a lot of work over the past few months on looking at how you can use a mix of assets to create a real-return portfolio.”

The vehicle won’t be limited to Asian investments. Holdings may include inflation-linked bonds in Brazil or Mexico, gold and property including shares of real estate investment trusts, Thompson said.

Asian Inflation

Consumer price gains averaged 4.5 percent in Singapore and 3.8 percent in Hong Kong over the past year.

Inflation in developing Asia will be 4.2 percent in 2013, the Asian Development Bank said in a December report. Economic growth will be 6.6 percent, the report said.

In the U.S., the world’s biggest economy, consumer prices averaged 2 percent over the past 12 months. Gross domestic product will expand 1.8 percent in 2013, based on a Bloomberg News survey of economists.

The Federal Reserve is buying $85 billion of bonds a month to put downward pressure on borrowing costs.

“Position for eventual inflation,” Gross wrote in his February investment outlook on the company’s website. Investors should buy Treasury Inflation Protected Securities, he wrote. Pimco, based in Newport Beach, California, is a unit Munich-based insurer Allianz SE.

Thai Linkers

Thailand sold 40 billion baht ($1.3 billion) of inflation-linked debt yesterday, drawing demand for three times the amount of debt available.

Bonds in an index of inflation-protected debt around the world have returned 6.3 percent in the past year, versus 3.7 percent for sovereign bonds, according to Bank of America Merrill Lynch indexes.

Pimco has tripled the size of its investment team in Asia. The company has 12 portfolio managers and credit analysts in Singapore and Hong Kong, up from four at the beginning of 2011, Ramin Toloui, the Singapore-based global co-head of emerging markets portfolio management, said this month.

There were 3.37 million millionaires in the Asia-Pacific region in 2011, more than in North America for the first time, according to a report last year by Capgemini and RBC Wealth Management.

Inflation Slowing

It may take time for Asia inflation funds to catch on, said Will Tseng, a fixed-income trader in Taipei at Mirae Asset Global Investments in Taipei, which oversees $50 billion. The pace of cost increases has slowed from 12 months ago in both Singapore and Hong Kong, he said.

“I don’t think inflation protection tools will be popular this year,” Tseng said. “This product may get popular in the future because of the stronger growth momentum” in Asia.

The Asia inflation fund will be managed by Mihir Worah, head of the head of the real return portfolio team in Newport Beach, Thompson said. Toloui will run the sovereign bond fund, he said. Pimco is considering introducing an Asian dollar-denominated corporate bond fund later this year, Thompson said.

Before it's here, it's on the Bloomberg Terminal.