In Profile – PIMCO’s Sam Watkins

Sam Watkins joined PIMCO in 2022 as its Head of Australia and New Zealand. In this interview, we delve into his leadership style and how to adapt to a continuously changing investment industry

In 1996, Sam Watkins donned a canary yellow jacket and set foot on the Sydney Futures Exchange in an effort to gain some work experience. At that time, the exchange was still an open outcry floor, where traders in brightly coloured jackets shouted their orders across the room.

Experiencing the controlled chaos of the futures market was a deeply visceral experience that Watkins would never forget.

“I got to witness the markets in the rawest of states, and I was hooked at that moment,” Watkins says in an interview with [i3] Insights.

He decided to become a commodity trader, but it wasn’t long before that market moved to electronic trading and so Watkins opted for the then flourishing derivatives industry instead.

“I started as part of a graduate program at Macquarie Bank, and my first role involved delta hedging derivatives, and market-making, listed derivatives, right at the coal face of market derivative trading,” he says.

Fast forward to today and Watkins now heads up the Australian and New Zealand business of PIMCO. Watkins labels his approach to leadership as ‘player/coach’. As coach he motivates his staff to put the client first and deliver that extra 1 per cent to create a centre of excellence.

But as a player, he continues to interact with a number of clients and keeps his boots on the ground.

“The player, which is a less common component across many of my peers, means that I still am deeply involved in a number of our largest client relationships, because I believe that by being closer to what’s happening in the industry, it puts me in a position to make better decisions,” Watkins says.

This is particularly relevant as the investment industry in Australia continues to change rapidly. Consolidation has picked up in recent years, as the regulator has made it clear it wants to see fewer and larger superannuation funds to achieve efficiencies of scale in the industry.

Moving to an industry composition with a smaller number of very large funds means clients’ needs are changing too. Larger investment teams allows organisations to become more specialised in their approach, while the insourcing of asset management functions further increases the sophistication of internal teams.

For PIMCO, this means that they are increasingly moving away from individual investment mandates to, what Watkins calls, a ‘hybrid’ model.

“Many years ago, it used to be that a trustee board would give a mandate and expect to hear from you once a month for an update of your NAV (net asset value) and maybe an explanation as to the performance,” he says.

“Now, that relationship has moved to a point where the external mandate for which PIMCO may have been appointed actually adds value to the internal management process too.

“For example, within a fixed income asset class, we may be running a securitisation mandate and that securitisation mandate is heavily focused on mortgages in the US, so quite a technical mandate.

“We would be appointed for that, but then there would be an expectation that we would be providing macro insights to the client too, which would feed into their asset allocation process, and perhaps very directly into their sovereign bond and duration exposures that they’re managing at the fund level.

“Given PIMCO’s macro background, we also frequently see a feedback loop into the CIO and into the asset allocation team with PIMCO’s views on rates, on foreign exchange, on geopolitical risk and on certain specific events, such as the US election.

“The biggest funds have already moved towards that approach, where there’s an expectation that any external manager is adding some sort of additional value to the internally managed asset process,” he says.

Another change in how PIMCO engages with clients is that the company’s services have become increasingly more customised to the client, resulting in very specialised strategies. For example, in the sovereign wealth fund sector mandates are often no longer based on a particular benchmark, such as the Bloomberg Global Aggregate Index, but on a client’s investment objective, whether that is a CPI plus target or otherwise.

And finally, Watkins has seen a greater demand for co-investments, where clients tag alongside a PIMCO transaction, a development that has largely been made possible by the increasing sophistication of investment teams in institutional investment organisations.

Scale in Wealth

And it isn’t just in the institutional part of the investment industry where Watkins has seen change. The wealth sector also has undergone significant change since the government implemented the Future of Financial Advice reforms in 2012, while the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry of 2017 provided another shake-up of the wealth industry.
These drivers caused Australian banks to mostly exit the wealth sector and terminate or divest the large army of aligned financial planners.

“The biggest reference point to me is that you had around two thirds of financial planners and advisers that were aligned, but now 80 per cent, roughly, of financial planners and advisers are not aligned. So that’s a dramatic shift in the way in which the market is organised,” he says.

“And what that does is create a huge challenge for scale engagement with that audience for asset managers like PIMCO. In that period, you’ve seen the rise of consultants, who are increasingly becoming a conduit for asset managers to achieve scale,” he says.

But PIMCO also has plans of its own to achieve scale in the wealth industry and Watkins hinted that more will be revealed in the fourth quarter of this year.

“It’s a little bit too early to give too much detail, but there is an initiative that we’re likely to go live with in Q4, which will be around bringing our existing products and some that we offer in the US to the Australian market in a scalable form,” he says.

PIMCO, as an investment house, has also seen significant change, especially after the acquisition of the company by Allianz in 2000. Known best for its expertise in bonds, which still form the largest part of its assets under management (AUM), in more recent years the company has developed expertise in real estate and in 2020 it gained oversight of the Allianz Real Estate business, and is now one of the largest and most diversified real estate managers in the world, with over US$190 billion in AUM in both public and private assets.

PIMCO has also developed a sizable alternatives business during its history. For example, PIMCO is one of the largest commodity managers in the world, with US$20 billion in AUM, while PIMCO has also been rated among the top 10 investment managers in hedge funds in Australia, according to Rainmaker.

It is an area where Watkins, with his extensive background in derivatives trading, feels right at home. Before joining PIMCO in 2022, worked as Head of Equity Finance Product for Asia Pacific at Goldman Sachs, where he was responsible for marketing, distribution, development, and structuring of equity finance products.

Before that he worked in the equities and derivative businesses of Deutsche Bank, Credit Suisse, and Macquarie Bank.

The way institutional investors use derivatives is continuing to evolve, partly as a result of their increasing sophistication, he says. Initially, derivatives were largely used as a tool for strategic and dynamic asset allocation.

“Derivatives were being used to constantly bring an ever-changing physical portfolio of assets back to what was defined as the strategic asset allocation. I would almost see that as being an overlay extension of the asset allocation process,” he says.

Later on, institutional investors also started using derivatives for optimising exposures to certain benchmarks and market betas. “Rather than being used just to rebalance the portfolio back towards the SAA, it was actually the end point for investment,” he says.

“For example, rather than having a whole suite of active and passive physical managers you can replace an active or a passive manager with the derivative exposure. A simple example would be where instead of having an active or a passive MSCI ACWI (MSCI All Country World Index) manager, you may hold a swap and then reinvest the collateral in some way to give yourself a benchmark plus outcome,” he says.

But today, some of the largest funds are using derivatives for capital efficiency, where investors gain exposure to assets, such as equities and bonds, through derivatives, which require a minimal cash outlay compared with a direct investment in those assets. This then frees up capital for investment in other assets with varying risk, return, and liquidity profiles.

“The way that we think about that is as an implementation approach that achieves the same investment return objective, but with a lower level of volatility and/or drawdown characteristics. That’s really the objective behind that,” he says.

Watkins recently published a paper, where he delves deeper into this emerging concept.

“Of those three different phases [of derivative usage]. I think the first one is very common. The second one is becoming more common and the third, I would probably say there’s only two or three of the largest of the superannuation funds that are ahead of this,” he says.

Looking Forward

With interest rates back to a level where bonds produce healthy returns and downside protection again, it is no surprise that Watkins is looking to tap into PIMCO’s heritage to grow the business in Australia and New Zealand.

“Bonds are back. We’re in a period now, where they have very attractive returns, without necessarily going too far out on complexity or risk, and so that’s a huge focus for us today,” he says.

An asset class that has proven to be particularly popular in the past few years is private credit. And it is easy to understand why. With returns as high as 10 per cent, diversification benefits, lower volatility levels than listed equities and solid underwriting standards, making widespread defaults unlikely, it has been an attractive proposition.

But PIMCO has flagged that this increased popularity has eroded the illiquidity premium to unsustainable levels. In a research note published in July 2024, the company pointed out that the illiquidity attracts a premium for a reason.

Locking up capital reduces an investor’s ability to generate alpha from active management, PIMCO argues, since alpha comes often from trades arising out of market dispersion or buying undervalued assets.

A portfolio of illiquid assets is also harder to rebalance, while illiquidity is problematic when unexpected spending costs arise. As such, illiquid assets should provide a premium over their public counterparts of at least 200 basis points, the company estimates.

But currently the illiquidity premium in investment grade segments of private credit markets has tightened to less than 100 basis points.

“Private debt is a very broad church. What most people think of when they say ‘private debt’ is corporate and market lending. And it’s true that there has been an enormous amount of capital raised in that space,” he says.

“I’ve heard it referred to as a ‘Golden Age’ and I think we’ve all become very cynical about anything that’s called a Golden Age. So, we have observed that space is becoming more crowded,” he says.

But Watkins is more positive on other areas in the private credit sector, especially of opportunities in asset-based lending, including aircraft leasing, student loans, auto loans, solar panels and equipment finance.

“There is a lot more complexity in that market,” he says. “It is one that we believe there are a lot more opportunities and it is one of the markets that PIMCO has one of the longest track records in, because securitisation is really something that’s been part of PIMCO’s heritage,” he says.

Mentoring

Apart from growing the business, Watkins is focused on the continued development and support of his staff. Mentoring is an important part of this. Every new starter within PIMCO in Australia is assigned a mentor, usually someone more senior, but who also sits outside of the vertical that that person’s been hired into. That way there are no conflicts of interest.

Watkins, himself, also has had the benefit of receiving mentoring during his career from a number of senior executives, who initially simply answered his questions, but as he became more experienced imparted more philosophical frameworks to him.

“Even within my time at Macquarie Bank, it became less about giving answers and more about the way to approach a problem, solving a problem. I guess it is a little bit like that old proverb of giving a man a fish and he eats for a day, but teaching a man how to fish and he eats for the rest of his life.

Asked if he still has business leaders that he sees as role models and Watkins first credits executives of his current and past companies, an illustrious line-up that includes Emmanuel Roman, PIMCO’s current CEO, Shemara Wikramanayake, CEO of Macquarie Bank and Lloyd Blankfein, former CEO of Goldman Sachs.

But outside of his circle of employers, there is one business leader that stands out for him: the former Chief Operating Officer of Meta.

“Sheryl Sandberg has been a really inspirational figure for many. She’s written a book called: ‘Lean In’ that talks a lot about bringing a dynamic energy to pursuing goals, and how infectious that can be across a team. That is something that really stands out for me,” he says.

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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.