What makes PIMCO run?
Rachel Oliver and Tom Marsh examine the strategy that made the group a target for Allianz
Long before the German insurer Allianz purchased the US fixed-income shop Pacific Investment Management Company for $3.3bn, PIMCO had its eyes set on horizons beyond the US market. This stems from the firm’s belief that the growth of pension and investment assets in non-US markets will outpace North America, which has become mature, and has benefited from the prolonged bull-run of the 1990s that has left many pension plans fully funded or over funded.
Of particular interest are Europe and Japan, where deregulation, the introduction of pay-as-you-go systems, increased use of consultants and cultural changes are turning those markets into huge pockets of accessible assets to foreign institutions. It has many investment firms recalling their glory days and eager to replicate the successes they enjoyed in the US. “When I look at Europe, I see the US 20 years ago,” says Jim Muzzy, one of the Newport Beach, California-based firm’s founders and managing directors.
The firm, which has $185bn in fixed income assets under management, intends to orchestrate its growth outside the US by developing a ‘PIMCO’ culture worldwide that will enable managers and regional offices to be responsive to clients and markets. It will achieve this by hiring quality people and cultivating a culture of ownership and adaptability whether it is in its Munich, Tokyo, Sydney, London, Singapore or Newport Beach offices.
It will also apply concepts that were imparted upon the firm nearly 30 years ago when it was visited by management guru Peter Drucker, who gave the firm its blueprint for success. According to Muzzy, Drucker said keep the management flat and don’t fall into a hierarchical structure, be innovative, accept change and watch your expenses. They are words that helped shaped the firm’s strategic thinking over the years and ones that the firm is using in its bid to become a truly global player as well as embrace the age of e-commerce.
That includes delivering products and results as much as it does managing client expectations. “We communicate with our client on what we’re doing, why we’re doing it and the results we expect to achieve. It’s an effort to make certain there aren’t any surprises,” Muzzy says.
To do this, PIMCO makes sure its client service representatives are investment professionals that either have a certified financial adviser designation or are en route to taking the three-year course offered by the Association of Investment Management & Research in Charlottesville, Virginia, the official pension investment industry group in the US. Having client reps with the CFA designation allows them to serve as surrogate portfolio managers and tells clients that they are knowledgeable and committed to the industry and, more importantly, it frees up portfolio managers to concentrate on managing assets.
Pimco is even investigating using the internet as a client-serving tool, but concedes that while the technology can offer clients account information at their fingertips, it also has its drawbacks. Mainly, it is harder for them to build relationships and capitalise on a client’s changing needs. “It’s a bit ageist, but some of our older clients want the face-to-face interaction. Our younger ones tend to want just an e-interface,” Muzzy says, admitting the challenge is to get the balance right.
The goal of this client service effort is to build longer-term relationships and open up new avenues to cross-sell products. For example, a pension fund may hire Pimco to run a total return strategy, but there may be an opportunity to run high-yield or an enhanced equity strategy as well. Similarly, if the firm is hired to run pension assets, it could lead to business in a client’s other asset pockets, such as its corporate cash or insurance funds. “What we’re trying to do with servicing is to enhance our ability to service clients and grow our asset base,” Muzzy relates. That increased servicing role has led to many PIMCO clients turning to the firm to serve as a pseudo-consultant and problem solver in the three areas the firm works: account management, business management and portfolio management. It is a strategy they will take to Europe and Japan
In Europe in particular, PIMCO wants to re-invent their success they had in the US and it sees a lot of similarities between the markets. Additionally, the introduction of the euro is opening up more opportunities as Europe will move to securitise mortgage and corporate markets, areas where PIMCO has a wealth of experience and knowledge. And as the euro is new, it has presented a level playing field for firms whether they are European or US in the sense that everyone is starting from a similar point when managing euro-denominated assets.
The firm’s five-year plan for Europe involves a three-pronged effort. Playing a large part in this effort will be its Dublin-domiciled pooled funds. These funds will be pitched at smaller pension plans; those with $50m–100m in assets, used in private label agreements with banks and insurance companies and directly marketed as a retail investment through broker dealers. It is a strategy that, again, worked in the US in the late 1980s. “When we came out with our total return fund for smaller plans in the late eighties, consultants didn’t think clients would go for a commingled product. But 80% of the total return fund’s $23bn in assets come from smaller pension funds,” Muzzy illustrates.
Markets of immediate interest include: the Netherlands and the Nordic region in general, Switzerland, Germany – not surprisingly given the new relationship with Allianz – France, the UK and to a lesser extent Italy, which still needs to loosen its regulatory reins, Muzzy says. Those markets are becoming more approachable. In the UK, pension funds are moving away from balanced mandates and into specialist accounts. Meanwhile, German and French funds are still big on fixed income investing.
Their success in Europe will not only depend on winning over clients and prospects, but their custodian bank as well. In the US, Muzzy explains, investment managers and custodians are viewed as equals when it comes to settlement issues. However, in Europe the custodian is the final arbitrator. “We’re using strategies such as US mortgages that the European custodian is not familiar with,” Muzzy says. With that in mind, PIMCO is setting out to educate the custodian as well as the client. “In Europe, we view the custodian as another client,” Muzzy relates. PIMCO will soon issue a CD-ROM that will set out to educate custodians and clients alike on the settling procedures for mortgages, why the strategy often trades more often than other types of investments and why, for example, the firm finds them attractive investments in the first place. This education is an effort to build credibility and strengthen relationships. “If they do not understand it, we’ll have a relationship problem,” Muzzy says.
And now that it has a local ally in its new owner Allianz, PIMCO looks set to be a very influential player in the European markets indeed. Watch this space.