Very singular focus
It’s been three years now since US west coast bond specialist Pimco was bought out by German giant, Allianz, and around a year since the firm began digesting the subsequent tie-up between Allianz and Dresdner. The firm could be forgiven for feeling a little sluggish on the back of such intense M&A activity.
If that were the case that is.
Happily for Bill Gross, CIO and founder partner of Pimco and Pimco CEO Bill Thompson, Pimco is in fine fettle. Seemingly energized by its tie-ups in Europe, the manager has been steadily picking up business in a market where investors are seeking a reliable harbour in the storm, if not reassessing what they want from bond exposures altogether.
Bill Thompson believes the reason for Pimco’s good health is related to a clear global commitment that started around five years ago when Pimco began to explore possibilities with non-US clients – a course, he says, that the Allianz and Dresdner deals have changed very little.
“At that time, it was clear to us that in certain other markets around the world deregulation, opportunities for retirement systems and changes to structures within different savings environments, were creating opportunities for a firm like ours to provide actively managed and performance driven fixed income products.”
Pimco started exploring these opportunities for distribution and servicing portfolios primarily with dollar denominated global bond or dollar assignments against straight US benchmarks.
The Allianz deal, says Thompson, did not involve any significant deviation from this path.
“When Allianz came along it was no turn in the road for us, more that we saw it as a chance to leapfrog further down that road through some of Allianz’s institutional connections and their visibility and reputation in Europe.”
The deal involved several Pimco portfolio managers and account and servicing people shifting to Munich. Prior to the Allianz buy-out, Pimco had already hired professionals in London, Singapore and Tokyo.
“The Munich focus was a result of this new partnership, but there were no significant ‘issues’ to deal with. Allianz did not have much of a fixed income division and they were a relatively new asset management company with a small third party business, particularly in fixed income, so there was no business conflict,” says Thompson.
However, he notes that at the same time there were only minimal synergies that arose from those early months. This changed when Allianz acquired Dresdner last year.
“Dresdner had its fixed income and asset management business, so in certain areas we had to resolve who would be responsible for the product lines and what the distribution would be. However, from the very beginning, Pimco was the fixed income platform at Allianz and would remain so under the Allianz Dresdner Asset Management (ADAM) umbrella.”
The resulting shift meant that everything previously operated by Dresdner was taken over by Pimco. This included the running of a small fixed income operation in San Francisco, as well as Dresdner’s Frankfurt-based fixed income team, which was consolidated into Pimco’s Munich operations. In London a small Dresdner UK gilt operation transferred to become part of Pimco’s London office.
Thompson says that overall there was no change in focus from Pimco’s original plans, just that the business grew faster than expected.
Gross, CIO, adds that culturally the Allianz approach suited Pimco’s direction. “They have a philosophy of very separate autonomous business strategy, as do we. We have a very singular focus to try and be the best fixed income manager in the world and Allianz doesn’t tell us how to manage money or direct us in terms of markets, products, compensation, promotion or hiring and firing.
“This is what we both knew and agreed to in the transaction when they acquired a majority interest.”
Gross believes this standpoint helped to reassure clients that the buy-out would mean business as usual. “I think that our existing clients three years ago were concerned about what would happen to our independence, because, as we know, a lot of times synergies through M&A activity can change a company in significant ways. “We wanted to make sure that we didn’t change very much though.
“There are always fears that some managers might cash out, but the arrangements that we made with Allianz tied in managers for five to eight years down the line.”
Thompson adds that Dresdner worked closely with Pimco to support the firm’s new initiatives and in the transfer of their client relationships – a factor that he says has meant little client dissatisfaction or terminations since.
One reason he believes the merger has not overreached itself is that expectations were not inflated on either side: “When I first spoke with the CEO of Allianz, we cautioned each other to not expect any miraculous synergies or great new things to come out of this acquisition. Often deals like this fail because both parties expect great new results from the combination. We expected little or none, but said that over time if they occur – for example in mutual fund distribution or certain ways of using each other’s resources – then that’s fine. Nonetheless, this was not the definition of failure or success. We wanted to stay on the course we were on. Everyone involved understood that and it has worked very well.”
Another solid aspect of the merger was that Dresdner’s assets were not overbearing when compared to Pimco’s existing business.
Says Thompson: “Third party fixed income assets from the German operation probably only account for about 10% of the total third party money that we manage worldwide. It’s an important slice and we hope it will grow, but it hasn’t changed our need for resources or focus in any way.”
With the merger having bedded down comfortably, Pimco’s strategy of selling its long-term focused bond approach in Europe has evolved to become more country specific – a factor the firm believes is essential to success on the continent.
The fact that the manager now runs over $300bn in assets for clients globally certainly gives it muscle.
As Thompson opines: “We believe we can transplant our analytic horsepower and our skill to this marketplace – and we are doing it – but we recognise that the real opportunity is to be able to deliver in Euroland and the local bond markets the types of products, and most importantly results, that we have delivered in the US.
“Dollar denominated products are important, but we recognise that we have to be here with local fixed income capability. Over time I think we will prove to be very able to meet that challenge.”
He flags up the UK as a specific market where he believes that to be a serious player requires ability in the gilt market. However, the European ‘approach’ is by no means homogenous. In the Netherlands, for example, Thompson says the firm has had success with Dutch institutions looking for global assignments and dollar mandates. Under the Allianz umbrella though, Germany, France and Italy have become local target markets through affiliated clients of Allianz.
“In these markets it is really important we have local capabilities, but with a strong bridge back to our HQ in Newport Beach. “The challenge is to be both local and global. You can’t just be a dollar driven, US market focused team any longer. We are now driven by forces, opportunities and risks on a global basis and this is crucial to everything we do.”
Just how important the global focus is is underpinned by bond guru Gross, who explains Pimco’s long-term bond perspective, which begins with looking at global economies and factors that influence interest rates and sector decisions.
“Underlying that approach we use intensive quantative methodologies, computer programs and risk measurements to decide on the buying and allocation of assets, but our policy of risk taking is to go for small as opposed to large bets – so that clients don’t have too many bad days in a row, so to speak.”
Gross points out that this strategy is what bond investors want: “They don’t want to be surprised and they want to get benefits from the fees they are paying. What it boils down to is outperformance on a consistent basis.”
In terms of products in the pipeline for Europe, Thompson says Pimco is trying where possible to introduce strategies that have been successful in the US. High yield, CDO and US mortgage-backed products are available to European investors seeking dollar denominated or currency hedging approaches.
The firm is also assessing appetite in Europe for an inflation protected bond fund that has swiftly garnered around $10bn in assets in the US.
“I’m not sure what the appetite is in Europe, but this type of product, as well as our Stocks Plus enhanced equity index product, have attracted a lot of attention in the US. “I don’t think we will bring the full range of products over from the US for a variety of reasons, but we hope to have a substantial product menu in Europe.”
Thompson underlines that it will be a menu where performance and innovation will be the appetisers, not competition on price.
“We have already made this case to clients in the States and the story holds together.
“Cosy markets and the relationships that have existed between funds and managers of assets are coming under severe pressure today because of performance, not price, and we seek to provide reasonable performance over time.
“We think the timing is good because on the back of a lot of disappointing results institutions are now looking to outsource to managers that can perform in all market conditions, whether they be local managers or not.”