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Neither PIMCO's New CEO, nor Parent Allianz, Plan to Upset Their Apple Cart

Both Manny Roman and Allianz know a good thing when they see it.

Eric Jacobson, 05/02/2017

In July 2016, PIMCO announced that it had hired former head of the LSE-listed Man Group EMG, Emmanuel "Manny" Roman, as its CEO effective Nov. 1, 2016.

Now that Roman's been on the job for several months and is settling into his new role, it's a good time to look at his likely impact on the firm. We have met with or spoken to Roman a couple of times since he took over, and our impressions have been largely positive.

For starters, he and group CIO Dan Ivascyn appear to be on the same page when it comes to some big-picture items. Roman says that they're both committed to maintaining a performance-based model for the firm, as opposed to others that might be driven more by asset growth, for example. Neither wants to revisit the defunct experiment of branching out into active management of equities, either, and they're both determined to avoid letting the firm become a collection of siloed groups.

On the other hand, both see room to invest more in technology and quantitative capabilities. Although PIMCO is widely considered to have some of the best execution--and ostensibly lower transaction costs--of its asset-management peers, Roman and Ivascyn see room to improve. They envision using those capabilities--including the possible hiring of additional quant specialists--to help optimize portfolio construction and gain so-called risk-factor exposures in the cheapest, most efficient way.

We'll be anxious to keep a keen eye on any such efforts. Driving portfolio efficiency and better execution makes perfect sense. To the degree that the firm looks to gain a competitive advantage from high-speed trading, though, we'd want to hear a case for how they might do it.

Roman also talked about the aforementioned quant effort in terms of crafting new systematic, risk-factor-based offerings for clients. That isn't surprising either, given that Man Group has already been doing similar things via some of its subsidiaries, such as AHL and Numeric, and they've been among that firm's notable areas of growth.

Raising Some Antennae
Such products are often packaged in hedge fund form, though, and one of the very first questions we heard after Roman's hiring was whether he was going to ramp up the firm's alternatives business. The Man Group, which manages more than $80 billion, is known mostly for its offerings in the alternatives space, including hedge funds, so the question didn't come out of left field. Roman has also spoken of expanding PIMCO's efforts in private-debt strategies, where he sees more opportunities and client requests.

Alternatives have already been a focus at PIMCO for the past several years, as evidenced by their more than $20 billion combined hedge fund and private debt/equity platform, so it wouldn't really represent a departure from PIMCO's business strategy. But it has understandably led some to wonder whether building it up was part of the reason Roman was brought on board. It's definitely an issue that could resonate with clients of PIMCO's more-traditional strategies--including those of most of its mutual funds--who would have reason to worry if it seemed the firm were devoting more attention to alternative strategies. Most have more-lucrative fee structures, so at least on paper it would be tempting for most firms to devote much more attention to them.

Roman has said that it makes sense for investors to be sensitive about PIMCO keeping its focus, and both he and firm president Jay Jacobs have downplayed the concern, arguing that PIMCO's product mix has a healthy balance that they'd prefer not to see upset. It seems extremely unlikely that PIMCO would do anything to jeopardize the loyalty of its current clients; it would clearly be a big problem if PIMCO's largest investors were to begin questioning the firm's commitment to its traditional business lines. While alternatives typically carry mouth-watering profit margins, PIMCO manages nearly $1.4 trillion overall (including roughly $400 billion for its parent, Allianz SE AZSEY), is already a high-margin business, and delivers generous profits in its own right. Anything that would threaten to upset that apple cart would clearly be folly, especially given the free hand Allianz has always given PIMCO to manage its business without putting pressure on the firm to generate bigger returns.

PIMCO Is Special
That last point is especially notable given that speculation in the press has repeatedly turned to whether Allianz was enforcing its will on PIMCO in an effort to address the latter's troubles, as well as the notion that Roman was brought in to clean house. For starters, the assertion that PIMCO was in dire straits when Roman joined overstates the reality. The surge in outflows following Bill Gross' departure, mainly from PIMCO Total Return PTTRX, had already slowed to a trickle by the time Roman was hired, and other PIMCO strategies experienced robust growth during the past couple of years. The senior investment team has mostly remained stable, and key leaders appear to have settled into their roles.

Those assertions also belie a persistent misunderstanding of the two companies' relationship. Gross was in the prime of his career when Allianz approached PIMCO, and the insurance giant understood that it would have to make significant concessions in terms of control in order to convince Gross and PIMCO to back the deal. The biggest was a tremendous level of independence. While Allianz has the right to approve a few very big-picture items, including whom PIMCO chooses to hire as CEO or CIO, the firm is primarily controlled by its managing directors, who essentially have the status of partners and who have made just about every major decision since PIMCO's acquisition. It seems unlikely there's another firm in the industry with a deal that good.

To be sure, were Allianz to choose, it could try to change the status quo. But that would be akin to a nuclear option. The roster of senior investment professionals at PIMCO is full of managers who could be stars in other organizations. That includes four past Morningstar Fund Managers of the Year and others who could easily be in contention under the right circumstances. Most have likely chosen to make their careers at PIMCO based on the firm's level of control and autonomy, not to mention what is reportedly some of the industry's most generous compensation. Tinkering with that design would likely be very dangerous.

There's a well-worn industry cliche that every asset-management firm's most valuable assets take the elevator downstairs and go home every night. Cliche or not, it's true, perhaps as much or more at PIMCO as anywhere else. And there's an ignominious club of firms that have ignored that truism in the past and paid dearly for it.

 

Eric Jacobson is Morningstar's director of fixed-income research and an editorial director for mutual fund content.

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