In break from Allianz, Pimco to launch its own brokerage biz
January 18, 2011 by January 18, 2011
With assets rising six-fold, mutual fund giant looking to gain more control over its destiny; ‘tail wagging the dog?’
January 18, 2011 8:59 am ET
In a step toward more independence, Pacific Investment Management Co. is taking control of fund sales from parent Allianz SE after assets at the bond manager jumped sixfold since the takeover a decade ago.
Pimco is waiting for regulatory approval to open a broker- dealer and plans to transfer 170 salespeople from Allianz to sell its mutual funds in the U.S., Douglas Hodge, the chief operating officer of the Newport Beach, California-based investment company, said in an interview. The firm last year opened its first actively managed stock mutual fund, competing with managers such as Nicholas-Applegate Investment Management, which is also owned by Allianz.
Pimco, the largest U.S. asset manager still owned by a bank or insurance company, is seeking more independence in marketing products as it forecasts the end of the 30-year bond rally that has fueled its growth. Led by Mohamed El-Erian and Bill Gross, assets at the firm have grown to $1.2 trillion from $200 billion when Allianz acquired it in 2000, making it the biggest money- management unit of the Munich-based insurer.
“The big issue is, as Pimco has grown, is the tail wagging the dog?” Jeffrey Hopson, an analyst with Stifel Nicolaus & Co. in St. Louis, said in a telephone interview. “They’ve set up their own equity business, and now it looks like they’re trying to control their own destiny.”
In a letter to mutual-fund investors describing the changes last month, Allianz Global Investors Distributors LLC called the switch a “natural part” of Pimco’s push into other asset classes. The firm told investors in the letter that it expects to complete the switch during the first three months of 2011.
Pimco’s Autonomy
The move will also allow Allianz’s salespeople to provide “greater focus and exposure” to other investment units, according to the letter. Allianz’s distribution unit will continue to sell funds for other subsidiaries, including NFJ Investment Group LLC, a Dallas-based manager that invests in dividend-paying value stocks.
The new unit, Pimco Investments, will be based in New York and run by Jon Short. Pimco plans to hire about 80 more people to expand the distribution unit to 250, Short said in an interview from New York. The idea is to bring financial advisers and investors closer to Pimco’s analysis and research, Short said, eventually cutting costs for investors.
Pimco, co-founded by Gross in 1971, has maintained some autonomy since the takeover by Allianz, relying on its own investment and executive committees to control investment guidelines, expansion plans and executive hires. The firm gives an undisclosed share of its income to Allianz.
‘Lots of Tension’
Pimco’s relationship with Allianz will not change as a result of the new distribution arrangement, Pimco’s Hodge said. Allianz Global Investors, the insurer’s asset-management unit, “fully supports” Pimco’s mutual-fund distribution in the U.S., spokesman Hanno Strube said in a telephone interview.
“The history of the asset-management business demonstrates time and time again that the most successful asset-management firms are those who are dedicated to investing rather than subsidiaries of banks and insurance companies where there can be lots of tension,” Burton Greenwald, a fund-consultant based in Philadelphia, said in an interview. “Fund companies tend to be entrepreneurial, while banks and insurance companies tend to be bureaucratic.”
The investment unit at Allianz accounted for about one- fifth of the insurance company’s net income in the three months ended Sept. 30. Allianz, Europe’s biggest insurer, said its bond-management unit’s operating profit rose 44 percent in the quarter from a year earlier to 432 million euros ($577 million), fueled by rising investor deposits into Pimco funds.
Total Return
Gross’s Pimco Total Return Fund has driven some of that growth, doubling in size to $240 billion since 2007 as investors flocked to bond funds. The fund, which had about $30 billion in assets when Allianz acquired the firm, in 2009 became the largest in mutual-fund history, surpassing the $202.3 billion record set by Capital Group Cos.’ Growth Fund of America in 2007.
“Pimco has evolved over the past couple of years to become such a strong individual brand that they’ve overshadowed the other managers” owned by Allianz, Steven Miyao, the chief executive officer of Kasina, a New York-based consulting firm for asset managers, said in an interview. “It’s a very unique situation.”
Allianz said Jan. 12 that Joachim Faber, the Allianz board member responsible for asset management at the time of the Pimco takeover, will retire at the end of the year. Faber, 60, will be replaced by Jay Ralph.
Succession Planning
Gross, 66, said in an interview last year that he has no plan to retire. He received more than $200 million from Allianz for his stake in Pimco at the time of the takeover. He also got $200 million over a period of five years for agreeing to stay on at the company.
El-Erian, 52, was named CEO of Pimco in 2008 and, as part of Pimco’s succession planning, shares the role of chief investment officer with Gross. An Oxford University trained economist who started his career at the International Monetary Fund, El-Erian was instrumental in formulating Pimco’s “New Normal” philosophy, which predicts lower returns for bonds, slower economic growth in the U.S., and a bigger role of developing markets in the world economy.
Allianz’s distribution unit currently sells more than 50 Pimco U.S.-domiciled mutual funds, 17 Pimco closed-end funds and 13 exchange-traded funds, according to its website. The mutual funds include Gross’s Total Return Fund, El-Erian’s Global Multi-Asset Fund and Pimco EqS Pathfinder, the global stock fund started last year by portfolio managers Anne Gudefin and Charles Lahr.
Selling Units
Some of the biggest financial companies have sold their asset-management units after the financial crisis, or are planning to do so. London-based Barclays Plc in 2009 sold its Barclays Global Investors unit to BlackRock Inc., now the world’s largest asset-management firm.
Societe Generale SA, based in Paris, has said it plans to take its investment unit TCW Group Inc. public. UniCredit SpA, the Milan-based bank that owns Pioneer Global Asset Management, said last year that it would review options including a sale for the unit, as part of its plan to strengthen its finances after the credit crisis.
Pimco is venturing into other asset classes including exchange-traded funds and funds to minimize the impact of economic shocks by the use of techniques such as hedging.
Equities Push
In 2009, the firm hired former U.S. Treasury official Neel Kashkari as head of new investment initiatives to help direct the expansion. Pimco also hired portfolio managers Gudefin and Lahr from Franklin Resources Inc. in 2009 to start a global equity fund and Goldman Sachs Group Inc.’s Maria Gordon last year to lead an emerging-markets group.
The issue of how Pimco’s funds are marketed and branded has been a source of tension with the firm’s other corporate parents in the past.
In 1999, the firm’s then-parent company Pimco Advisors Holding LP set up a unit called Pimco Equity Advisors. It was run separately from Gross’s bond unit yet hoped to benefit from the success of his business by taking the Pimco name. The equity managers ran into legal trouble a few years later as the Securities and Exchange Commission and New Jersey’s attorney general accused managers in 2004 of allowing a hedge fund to engage in market timing.
Gross’s Regrets
Following the lawsuits, Gross said that he regretted allowing the equity unit to use the Pimco brand. The equity group, which didn’t admit or deny wrongdoing, paid a combined $68 million in fines and repayments to investors to settle the regulators’ lawsuits. The stock funds were turned over to Allianz and were subsequently liquidated.
Pimco was started as a unit of the insurer previously known as Pacific Mutual Life Insurance Co. almost four decades ago. In 1994, Pimco and four other asset managers owned by Pacific Life did a reverse merger with Thomson Advisory Group LP, in which a closely held company acquires a public company. The combined entity, Pimco Advisors LP, became publicly traded, a run which ended when Allianz completed its acquisition of a 70 percent stake in the asset manager for $3.3 billion.
–Bloomberg News–
