In break from Allianz, Pimco to open own brokerage biz

With assets up sixfold, bond fund giant seeks more say in its destiny

By Bloomberg News

Jan 23, 2011 @ 12:01 am (Updated 3:01 pm) EST

In a step toward more independence, Pacific Investment Management Co. LLC is taking control of fund sales from parent Allianz SE after the unit's assets jumped sixfold since the takeover a decade ago.

Pimco is waiting for regulatory approval to open a broker-dealer and plans to transfer 170 sales representatives from Allianz to sell its mutual funds in the U.S., Douglas Hodge, the investment company's chief operating officer, said in an interview. The firm last year opened its first actively managed stock mutual fund, competing with managers such as Nicholas-Applegate Capital Management LLC, 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. Assets have grown to $1.2 trillion, from $200 billion when Allianz acquired it in 2000, making it the insurer's biggest money manager.

“The big issue is, as Pimco has grown, is the tail wagging the dog?” Stifel Nicolaus & Co. Inc. analyst Jeffrey Hopson said. “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.

The move also will allow Allianz's sales force 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, which invests in dividend-paying value stocks.

The new unit, Pimco Investments, will be run by Jon Short. Pimco plans to hire about 80 more people to expand the distribution unit to 250, Mr. Short said. The idea is to bring financial advisers and investors closer to Pimco's analysis and research, he said, eventually cutting costs for investors.

Pimco, co-founded by Bill Gross in 1971 and run by Mohamed El-Erian, 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, Mr. 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.

“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,” said Burton Greenwald, a fund consultant. “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-month period ended Sept. 30. Allianz, Europe's biggest insurer, said its bond management unit's operating profit rose 44% in the quarter to $577 million from a year earlier, fueled by rising investor deposits into Pimco funds.

Mr. Gross' Pimco Total Return Fund has driven some of that growth, doubling in size to $240 billion since 2007 as investors have 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 American Funds' 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, said Steven Miyao, CEO of kasina LLC, a consulting firm for asset managers. “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. Mr. Faber, 60, will be replaced by Jay Ralph.

Mr. Gross, 66, said in an interview 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 on at the company.

Mr. 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 Mr. Gross. An Oxford University-trained economist who started his career at the International Monetary Fund, Mr. 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 for 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.

Some of the biggest financial companies have sold their asset management units since the financial crisis or are planning to do so. Barclays PLC in 2009 sold its Barclays Global Investors unit to BlackRock Inc., now the world's largest asset management firm.

Société Générale SA has said it plans to take its investment unit The TCW Group Inc. public. UniCredit SpA, which owns The Pioneer Global Asset Management SpA, said last year that it would review options including a sale of 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 hedge funds, to minimize the impact of economic shocks.

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.

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 1999, the firm's then-parent company, Pimco Advisors Holdings LP, set up a unit called Pimco Equity Advisors LLC. It was run separately from Mr. Gross' 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.

Following the lawsuits, Mr. 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.

Allianz paid $3.3 billion to acquired a 70% stake in Pimco, which was started almost four decades ago as a unit of the insurer then known as Pacific Mutual Life Insurance Co.