Pimco sees demand for simpler bond products

FRANKFURT (Reuters) - Institutional investors are shunning complex structured investment products in favor of simpler portfolios with clear strategies, a top executive at asset manager Allianz Global Investors said on Wednesday.

"Our clients are looking for simpler products," said Matthieu Louanges, head of portfolio business management at Pimco, AllianzGI's fixed-income investment arm.

AllianGI has about 1 trillion euros ($1.4 trillion) invested on behalf of its parent Allianz (ALVG.DE), Europe's biggest insurer, and third-party customers.

Relatively safe investments such as Pfandbrief covered bonds, high-grade corporates and state-guaranteed bonds are expected to offer especially attractive returns, Louanges told a journalists' briefing.

Real money players who are able to buy and hold even relatively illiquid assets are bolstering the trend toward simpler portfolios, he said.

"Two years ago, hedge funds were the price-setters. Today, foundations and life insurers have much higher bargaining power," Louanges said.

The change was a consequence of higher transaction costs as well as the broad unwinding in financial markets of investments made with borrowed cash, such as hedge funds' investments in the complex asset-backed securities at the heart of the financial crisis.

Pimco's customers also expect rising inflation in the medium term, Louanges said, adding that inflation of 3-4 percent in Europe and the United States was possible in the years beyond 2010.

"We see strong demand particularly from institutional investors for inflation-indexed bonds," he said.

Germany sold 2.76 billion euros of a new bond linked to euro zone consumer prices on Wednesday, with bids 1.7 times the value allotted.

Louanges said he expects higher risk and inflation premiums and rising government deficits to prompt a steepening at the long end of the yield curve.

(Editing by David Cowell)