Allianz CEO Says Pimco Equity Expansion Proving Difficult
Pimco’s stock funds, which have attracted less than 1 percent of firm-wide assets since the effort started almost four years ago, would be considered a success for a smaller asset manager, Diekmann, who is chief executive officer of Munich-based insurer Allianz, said yesterday in an interview at Bloomberg’s headquarters in New York. Given that Pimco oversees about $2 trillion in mostly bond assets, the amount it attracted into stock funds is less significant, he said.
“It’s obviously more difficult than we expected it to be, but I’m very happy that they do this in a professional way, and not getting into sort of acquisition mode,” Diekmann, 58, said. “I don’t declare victory yet, but neither do I say it’s been a failure,” said Diekmann, whose Allianz in 2000 acquired a stake in Newport Beach, California-based Pimco, the world’s biggest bond firm.
Gross, whose name is synonymous with fixed-income investing, has sought to diversify into stocks and other assets in anticipation of an end to the three-decade bond rally. Unlike rivals such as BlackRock Inc. (BLK), which made acquisitions to move beyond bonds, Pimco chose to grow by adding managers and strategies one at a time. Pimco’s stock push has lost momentum just as investors are fleeing the bond market, removing an estimated $120 billion from fixed-income mutual funds since May.
Pimco also faced a setback this year with the departure of Neel Kashkari, who was hired in 2009 to oversee the unit’s expansion after earlier attempts to add stocks fizzled. Pimco has yet to name a replacement for Kashkari, who stepped down in January saying he wanted to pursue a career in public service. The equity unit’s mutual funds account for about $3.8 billion of Pimco’s $1.97 trillion in assets.
“If you’ve been always a fixed-income manager, you cannot turn into an equity manager in one year,” Diekmann said.
Led by Co-Chief Investment Officers Gross and Mohamed El-Erian, Pimco has a top-down macroeconomic view that helps guide all of its investing decisions -- a departure from how stock pickers usually choose securities. Pimco unsuccessfully tried to expand into equities in the 1980s, when its bond traders overwhelmed a handful of equity managers at strategy meetings, and again in the late 1990s, when Pimco’s then-parent company created an equity unit separate from the bond business to take advantage of the Pimco name.
“Pimco continues to make important progress in our multi-year evolution,” Chief Operating Officer Doug Hodge said in a statement. “Pimco’s equity offerings span a range of strategies and styles, including the StocksPLUS suite of funds, and our active long-short, dividend, emerging market and deep value equity strategies, totaling more than $50 billion in assets under management.”
Hodge said Pimco plans to proceed with its strategy of “organic growth” by adding resources and introducing additional strategies in equities, alternatives, ETFs and other areas. Pimco’s StocksPLUS funds, which attempt to beat the stock market by using a combination of bonds and derivatives, predated the firm’s equity expansion.
Diekmann said he’s patient with Pimco’s slow growth in equities and is happy with the firm’s decision to increase assets organically rather than by making acquisitions. He also said it’s beneficial to have top-down research available to the stock managers.
“I’m not concerned about Pimco,” Diekmann said. “The only thing that would concern me is if your long-term performance would start to suffer.”
The returns at Pimco’s new stock funds have been mixed. Pimco’s first stock fund, the $2.2 billion EqS Pathfinder (PATHX), which opened in April 2010, returned 7 percent over the past three years, ahead of 53 percent of rivals, and 15 percent over the past year, behind 88 percent of peers, according to data compiled by Bloomberg. The firm’s $455 million Emerging Markets Fund (PEQWX) returned 6.7 percent over the past year to beat 52 percent of rivals, and its $569 million Long/Short Fund (PMHIX) is up 24 percent over the past year, ahead of 83 percent of similarly managed funds, data compiled by Bloomberg show.
The $649 million Pimco EqS Dividend Fund, whose co-manager Cliff Remily departed earlier this month, delivered 15 percent to investors, behind 88 percent of peers, the data show.
“It’s fair to say that on the face of it, at first blush, the EqS funds have been rather lackluster performance-wise out of the gate, so they’re still all very unproven,” said Dan Culloton, associate director of fund analysis at Morningstar Inc. (MORN) “It’s early days for these funds, and for Pathfinder, it’s not an environment conducive to their defensive style.”
The slower-than-anticipated growth of Pimco’s stock unit comes as investors, who had poured money into bonds since the 2008 financial crisis, are starting to reverse course. Bond-market redemptions were triggered by Federal Reserve Chairman Ben Bernanke, who told Congress May 22 that the central bank could start reducing its unprecedented stimulus.
Gross’s Pimco Total Return Fund, on track to have the worst redemptions ever this year, has lost almost $30 billion through Sept. 30, according to estimates from Morningstar in Chicago. Pimco’s U.S. mutual funds had four straight months of withdrawals starting in June, totaling $39 billion. This year through Sept. 30, the funds had $8.9 billion in net redemptions, Morningstar said.
The $250 billion Pimco Total Return Fund (PTTRX), the world’s largest mutual fund, returned 8.3 percent over the past five years, ahead of 84 percent of peers. This year, the fund is down 1.9 percent, behind 56 percent of rivals, according to data compiled by Bloomberg.
Diekmann said he isn’t worried about too much reliance on Gross, since the firm has performed stress tests to make sure it could continue managing money in Gross’s absence. He also said his impression is that Gross, 69, has no intention to retire.
Pimco, co-founded by Gross in 1971, has maintained some autonomy since Allianz completed its acquisition of a 70 percent stake in the asset manager in 2000. Allianz gave Pimco greater independence in 2011 by handing over the responsibility of global distribution to the firm, and separating it from the other asset managers it owns.
Some analysts, including Thomas Seidl at Sanford Bernstein in London, question Allianz’s commitment to hold on to Pimco.
“We think shareholders would still benefit most from a partial IPO of Pimco in order to unlock the hidden value, but do not expect current management to realize this value for its shareholders,” Seidl wrote in a note to clients on Oct. 10.
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