Allianz's Parts Aren't Greater Than Its Whole Yet

Allianz SE, which is best known for selling insurance and owning bond-giant PIMCO, has steadily built up its asset-management business since 1998. Allianz Global Investors, or AGI, rose from a flurry of acquisitions between 1999 and 2001, resulting in four boutiques that operate autonomously and serve as subadvisors to more than 40 Allianz funds in the United States (excluding PIMCO funds, which receive separate Stewardship Grades).

No More Deals
AGI says it has no plans to buy more investment boutiques. Instead, it has spent the past few years changing its lineup and trying to improve operational efficiency for its subadvisors. In March 2010, for example, it officially integrated support functions for three subadvisors--NFJ Investment Group, Nicholas-Applegate Capital Management, and Oppenheimer Capital (not to be confused with Oppenheimer Funds, a former sister company)--under the Allianz Global Investors Capital, or AGIC, umbrella. This change helped consolidate compliance, information technology, risk management, and other operational functions that previously had been carried out separately at each boutique. The three firms no longer have their own profit/loss statements, and part of AGIC's compensation plan now includes equitylike units linked to AGIC's growth rather than that of the individual subadvisor firms.

Around the same time, AGIC phased out the Nicholas-Applegate and Oppenheimer Capital names, rebranding those funds with the AGIC moniker, but keeping the managers and investment processes. The Allianz NFJ brand remains, however, which is unsurprising given that it runs four of AGI's five biggest funds and has established a reputation for its successful value- and dividend-oriented investment philosophy. Allianz RCM funds, run by RCM Capital Management, were excluded from the reorganization altogether due to their recognizable brand name overseas.

This organizational change occurred around the time Cadence Capital Management--the only subadvisor Allianz didn't own--ended its distribution relationship with AGI. (Cadence Capital is now associated with Affiliated Managers Investment Group.) As a result, AGI went from six brand names to four, if you include its target-date funds, marketed as Allianz Global Investors Solutions. The firm's efforts to streamline its lineup preceded more big news in mid-2010: PIMCO funds, which had long been sold by Allianz Global Investors Distributors, or AGID, announced it was forming its own sales team in early 2011. The shift means the AGID salesforce can no longer push hot-selling funds like PIMCO Total Return, which often dominated its conversations with advisors and other investors. Instead, the AGID wholesalers now focus on a lineup of mostly equity funds, more than half of which have launched in the past decade.

Serving Shareholders or Mammon?
This change to Allianz's distribution structure could be interpreted in several ways from a stewardship perspective. On one hand, Allianz's non-PIMCO funds could grow--and fees could come down--because the funds are getting more attention from the sales staff. The new structure also allows the AGI funds to distance themselves from the PIMCO funds, which have been very successful asset gatherers but would be susceptible to big outflows should PIMCO Total Return underperform. On the other hand, when fund companies focus on gathering assets, the corporate culture--and fundholders--can suffer. The industry's leading stewards of capital focus first on serving shareholders well and delivering strong performance, both of which tend to lead to higher assets under management without a big sales and marketing push.

The highlights in AGI's lineup include the offerings subadvised by NFJ, which comprise three fourths of AGI's $27 billion in mutual fund assets as of May 2011. The Dallas-based firm runs AGI's biggest funds, including Allianz NFJ Dividend Value PNEAX ($8.2 billion), the closed Allianz NFJ Small Cap Value PNVDX ($8.1 billion), and Allianz NFJ International Value ANJIX ($2.3 billion). NFJ dates back more than two decades and has steadily built up a close-knit team with strong manager retention, save for one departure and a recent retirement.

Besides the NFJ offerings, though, AGI lacks notable flagship funds. Many of its best performers are niche offerings, such as the $1.3 billion Allianz RCM Technology DRGTX. This technology fund was an Analyst Pick for years, but it was removed in 2009 due to its high expenses. Allianz AGIC Convertible ANNPX and Allianz AGIC High Yield Bond AYBIX are other standouts during the past decade. Some funds with decent long-term records, including Allianz AGIC Growth PGWAX, have experienced manager changes. Still others simply haven't impressed, including Allianz AGIC International NAISX, Allianz AGIC Global NGBAX, and Allianz AGIC Target PTAAX. Overall, about 60% of AGI's funds fall in the top half of their respective categories for the trailing five-year period through May, which is OK, but not great--especially considering the lack of noteworthy strategies.

Mixed Bag
AGI has handled some underperformers well, putting a few struggling value funds into the more capable hands of NFJ, such as the former Allianz OCC Value and what's now known as Allianz NFJ Renaissance PQNAX. It also liquidated a few funds, including Allianz NACM Global Equity 130/30. AGI's record on fund launches is mixed, though. Some, including its target-date lineup and Allianz NFJ Global Dividend ANUAX, seem reasonable. Others are niche funds that would be difficult for investors to incorporate into their portfolios, including Allianz RCM Global Water AWTAX and Allianz RCM Global EcoTrends AECOX, the latter which has performed horribly since inception. RCM also is making a bigger push into alternatives, building out its team and launching long-short funds Allianz RCM Redwood ARRAX and Allianz RCM All Alpha AZPAX since late 2010. Time will tell whether this endeavor is successful.

Although parts of AGI's fund lineup might seem underwhelming, the firm as a whole has made some notable shareholder-friendly moves. It improved its website, adding market commentary and attribution data for some of its biggest funds. In an effort to be more transparent, portfolio holdings are now disclosed five business days after month end--a best practice in an industry that requires only quarterly disclosure after a 60-day delay. AGI's distribution of the Project M magazine and its affiliation with the Center of Behavioral Finance also serve as valuable educational tools for investors. Meanwhile, AGI Academy, initially launched to educate client-facing employees, has expanded to include others to foster better understanding of the organization. Finally, Allianz's five-year manager retention rate through December 2010, while not industry-leading, is a reasonable 89%.