What does the future portend for Pimco?
By Jeff Benjamin
Jan 24, 2014
As speculation abounds on what really drove Mohamed El-Erian to resign his leadership post at Pacific Investment Management Co., the move is raising larger questions about the future of the fixed-income powerhouse and its four-year effort to become a force in the equity world.
Much has been made over the past week about who will succeed Bill Gross, the 69-year-old Pimco co-founder, now that Mr. El-Erian, 55, has said he will step down in March as chief executive and co-chief investment officer.
But, as that question is bandied about — and beyond whatever internal politics or strife might have led to Mr. El-Erian’s departure after just seven years — the bigger question analysts and investors are asking is where Pimco is headed from here.
“Can Pimco be a successful fixed-income house in all markets? Likely,” said mutual fund industry consultant Geoff Bobroff.
“They will face the ebbs and flows of being a single product provider,” he added. “But to try and get into the equity space is a significant commitment, because when you have a strong fixed-income culture, bolting on an equity structure is difficult.”
By most measures, the wind is in the face of the $2 trillion asset management company, which focuses almost exclusively on fixed-income portfolios. Of the more than $516 billion that Pimco manages in open-end mutual funds, just $29.6 billion, or 5.7%, is represented by equity funds, according to Morningstar Inc.
With interest rates still hovering near historic lows and the Federal Reserve dialing back on its record-level quantitative-easing program, it would seem that any firm so heavily weighted toward fixed-income asset management would be vulnerable to asset outflows and/or poor performance.
Indeed, the company suffered $30 billion in net outflows last year, compared with $62.7 billion in net inflows in 2012. Pimco’s taxable bond funds had $44 billion in net outflows last year, versus $55.4 billion in net inflows in 2012.
In terms of performance, the Pimco funds on average finished the year in the 63rd percentile, down from the 43rd percentile in 2012, and the 42nd percentile in 2011.
While some market watchers and industry analysts are claiming Pimco desperately needs to diversify its product line, Jeff Tjornehoj, head of Americas research at Lipper Inc., believes Pimco is such a significant player in the bond space that it should just do more of what it does best.
“When you think about the overall bond fund and ETF industry being just over $4 trillion, it is easy to see that Pimco is a significant part of a very large market, and I don’t think they have anything to worry about,” he said. “For a firm their size, $44 billion in outflow is small.”
In terms of making a bigger move toward the management of stock portfolios, Mr. Tjornehoj said it makes no sense as a business strategy.
“I think it’s important for them to maintain their brand as a bond manager, rather than expand into areas where they may not have a lot of interest,” he added. “Pimco doesn’t have anything to be ashamed of for losing assets last year. They’re expert asset managers, and they seem to have the institutional investor capacity to weather storms.”
Pimco, which is owned by German insurer Allianz SE, did make a small push into the equity space in late 2009 with the hiring of Neel Kashkari as a managing director in charge of new initiatives. Under Mr. Kashkari’s leadership, Pimco launched six equity mutual funds before he resigned in January 2013.
Proving that it isn’t giving up on equities, in October Pimco hired Virginie Maisonneuve as global head of equities. Ms. Maisonneuve came from Schroders PLC, where her title was also global head of equities.
Pimco representatives did not respond to requests for comment for this story.
“Pimco is clearly disproportionately exposed to fixed income and fixed income is out of favor,” said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ. “I think they are at a turning point, and there are opportunities for them because the fixed-income market will be more stable in 2014 than it was in 2013.”
Pimco isn’t the first bond-heavy money manager to move into stocks. Rival BlackRock Inc., the world’s largest money manager, built its reputation as a bond specialist but has successfully diversified. Of course, its 2009 acquisition of Barclays Global Investors, with its iShares exchange-traded funds, the biggest ETF provider, helped.
If Pimco does start to beef up its equity product line, it still might not be enough to entice investors, especially if it sticks with heavily engineered products that rely on derivatives.
“My sense is Pimco will try to launch more equity funds, especially if we see equities do well over the next few years,” said Mr. Bobroff. “But they will be highly engineered, because their fixed-income products are highly engineered, and that’s what they do. They use derivatives extensively through all their products.”
Indeed, one of the two Pimco portfolio managers named as deputy chief investment officers last week, Daniel Ivascyn, is a lead portfolio manager for the firm’s alternatives investment strategies. In the same week he was appointed deputy CIO, Morningstar named him and co-manager Alfred Murata as portfolio managers of the year in the multisector bond category.
The other deputy CIO named last week is Andrew Balls, who heads the firm’s European portfolio management team.
Logic would suggest that the power of the Pimco brand could support just about anything, an impression that is reflected to some degree in the financial advice community.
“I’d be totally open-minded to an equity fund from Pimco,” said Keith C. Goddard, chief executive of Capital Advisors Inc., which manages about $1.3 billion.
“Pimco, in my opinion, has shown itself as a very capable research house, and those skills should translate into equities very well,” he added. “They need to be something other than a bond shop because the 30-year bull market in bonds is probably over.”
Tom Florence, chief executive of 361 Capital, which manages $461 million in advisory-business assets, expects Pimco to move beyond equity products.
“You’re going to see Pimco launching products not just in equities, but anywhere so they can diversify away from the concentration they have in fixed income,” he said. “If you have as big a distribution force as they do, that’s clearly going to help them in creating interest and creating demand.”