It's setting up a mutual fund broker-dealer, which may be the start of separation
Pacific Investment Management Co. may be seeking more independence from its parent, German insurer Allianz (AZ). Pimco, the largest U.S. asset manager owned by a bank or insurance company, is waiting for regulatory approval to open a broker-dealer to sell its funds in the U.S., says Douglas Hodge, chief operating officer of the Newport Beach (Calif.) money manager. The firm has designated 170 salespeople from Allianz to staff the new unit, to be called Pimco Investments.
Led by Bill Gross and Mohamed El-Erian, Pimco has seen assets climb to $1.2 trillion from $200 billion when Allianz acquired it in 2000. Much of the firm's growth has been fueled by Pimco Total Return, managed by Bill Gross, which is the world's largest mutual fund, with assets of $240 billion. Last year it opened its first actively managed stock mutual fund, Pimco EqS Pathfinder, which now has assets of $875 million. "The big issue is, as Pimco has grown, is the tail wagging the dog?" says Jeffrey Hopson, an analyst with Stifel Nicolaus in St. Louis. "They've set up their own equity business, and now it looks like they're trying to control their own destiny."
Some of the biggest firms sold their asset management units after the financial crisis, or are planning to do so. In 2009, London-based Barclays (BCS) sold its Barclays Global Investors unit to BlackRock (BLK), now the world's largest asset management firm. Société Générale, based in Paris, said in 2009 that it planned to take its investment unit TCW Group public over the next five years.
"The history of the asset management business demonstrates time and time again that the most successful asset management firms are those [that] are dedicated to investing rather than subsidiaries of banks and insurance companies where there can be lots of tension," says Burton Greenwald, a fund consultant in Philadelphia. "Fund companies tend to be entrepreneurial, while banks and insurance companies tend to be bureaucratic."
Pimco Investments will be based in New York and run by Jon Short, who says he plans to hire about 80 more people to expand the distribution unit to 250. 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. Pimco's relationship with Allianz will not change as a result of the new distribution arrangement, Hodge says. Allianz Global Investors, the Munich-based insurer's asset management unit, "fully supports" Pimco's mutual fund distribution in the U.S., says spokesman Hanno Strube.
Gross' Pimco Total Return Fund has doubled in size, to $240 billion, since mid-2008 as investors flocked to bond funds. The fund, which had about $30 billion in assets when Allianz acquired the firm, became the largest in mutual fund history in 2009, surpassing the $202.3 billion record set by Capital Group's Growth Fund of America in 2007.
Gross, 66, said last year that he has no plans 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. El-Erian, 52, was named chief executive officer of Pimco in 2008 and, as part of Pimco's succession planning, shares the role of chief investment officer with Gross. A University of Oxford-trained economist who started his career at the International Monetary Fund, he 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 in developing markets in the world economy. Reflecting that outlook, the firm has been diversifying. In 2009 it hired former U.S. Treasury official Neel Kashkari as head of new investment initiatives, along with Anne Gudefin and Charles Lahr from Franklin Resources to start EqS Pathfinder. Last year it hired Goldman Sachs' Maria Gordon to lead an emerging-markets group.
The bottom line: Pimco is establishing its own mutual fund sales operation in a move that gives it increased independence from parent Allianz.