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Rating:Pimco's Distribution Move Could Make Allianz a Buyer Not Rated 4.0 Email Routing List Email & Route  Print Print
Tuesday, August 03, 2010

Pimco's Distribution Move Could Make Allianz a Buyer

Reported by Sean Hanna, Editor in Chief

Bill Gross and Pimco are on top of the mutual fund world. One would think that this would be a good thing for Allianz, the German bank that bought Newport Beach, California-headquartered Pimco, but sometimes success brings more headaches than rewards.

Sources at both Pimco and Allianz have long spoken of a rift between the managements at the two firms caused by Bill Gross' desire to keep his independence from the firm's parent. That issue was only deepened in 2008 when Allianz Global Investors tapped the then-Neuberger Berman distribution chief and industry star Brian Gaffney to rebuild its U.S. distribution arm.

Gaffney quickly put together a distribution team focused on bringing Allianz and its funds, including those from Pimco, into the advisor market both on the retail side and on the defined contribution investment-only side. That channel had been one that the institutionally-focused Pimco sales team had never aggressively attacked. While those moves are paying off in higher visibility, that have also led to squabbles over who should receive the credit, say sources at both firms.

Now Gross and co. at Pimco are cutting ties with Allianz Global Investors Distributors (AGID), The MutualFundWire has learned. The decision shifts distribution of the $234 billion Pimco Total Return -- the biggest bond fund in the world -- and the rest of Pimco's funds out of AGID's hands and onto Pimco's. AGID will continue to sell offerings from other affiliates in the United States.

The decision could be an inflection point for both Pimco and Allianz. Word of the decision was shared in a letter sent by Gaffney and Jon Short to clients last Tuesday.

For Pimco, the move comes as the firm is in a distribution sweet spot. Over the past two decades Gross has built his reputation for being the best bond manager in the world. Over the past two years mutual fund investors have flocked to fixed income funds to escape the increased downside volatility in the stock market. Put the two facts together and Pimco has become an order taker more than a seller of mutual funds. A recent Bloomberg article quotes Gross as saying that Pimco is luring nearly $1 billion of assets a week. With the cash flowing, Pimco managers have to worry more about where they put money to work than whether they will have money to put to work.

Thus, its decision to set up a broker-dealer called Pimco Investments. The new unit is expected to be operational in earlier 2011 and will be run by Jon Short, currently head of Pimco's U.S. institutional business development group, according to a source familiar with the situation and will be based in New York City in different office space than Allianz. The MFWire has also learned that Eric Sutherland, currently head of distribution and national accounts at AGID, will move to Pimco and take on a similar role.

For the short term, cutting out Allianz will keep a few more basis points in the hands of Gross and Pimco and away from Allianz. With its strong inflows, those basis points add up, but it is unlikely that they drove the decision.

Rather, with its reputation and burgeoning asset base, Pimco also has the resources to put together virtually any team or sales effort that it wants. Creating its own distribution arm cuts a significant tie to Allianz and the move would presumably make it easier for Pimco to operate freely should Allianz' leadership choose to let it go.

Pimco insiders say not to read anything between the lines in the launch of the Pimco broker-dealer and that the project has been in the works for a number of months. However, it is widely believed inside the industry that Gross has wanted to control his own fate, something that he has never really had the opportunity to do. Pimco was, of course, founded with capital from Pacific Mutual Life. The insurer then sold Pimco to Allianz, once again leaving Gross to report to corporate higher ups.

Gross's desire to be independent added to the firm's recent decision to create an equities arm and now the broker-dealer, all suggest that Pimco's freedom is the next step in a natural progression.

With Gross and co. having convinced Berlin-based Joachim Faber to break out of the the multi-manager Allianz distribution model that was Fader's own vision, the is door is open for Gaffney (who will remain as AGID's CEO) to escape what has been a no-win fight between the Allianz sales team and the stable of asset managers it has put together.

Without Pimco in their portfolio, AGID's wholesalers will have no choice but to focus on Allianz' other products. Those existing brands that can be leveraged include: Oppenheimer Capital LLC (OPCAP), Nicholas Applegate Capital Management (NACM) and NFJ Investment Group.

The MFWire has also learned that Gaffney has been kicking the tires at boutique asset managers. Without the Pimco sales monster feeding his distribution team, it would make sense for Gaffney to find other brands for Allianz to bring under its tent to create a more diverse line for customers.

One firm that Gaffney was in talks with, according to an insider at Allianz, was Fuller Thaler Asset Management. The California Bay Area-based firm has been a subadvisor to two JP Morgan Chase mutual funds (Undiscovered Managers Behavioral Growth Fund and Undiscovered Managers Behavioral Value Fund). Its co-founder Dick Thaler is a leader's in the development of behavioral finance, work that puts him on the short list for a Nobel Prize in economics.

While those talks broke down, Gaffney's interest in the firm reflect a seemingly sound strategy. Gaffney is focused on building the intellectual capital at Allianz in order to create a sustainable edge for the firm in an increasingly crowded and undifferentiated market for asset management services.

In May, for example, Allianz released a white paper authored by UCLA professor Shlomo Benartzi on the issues raised by behavioral finance theory in regards to the retirement income puzzle (retirement income is seen by many thought leaders as the next great issue facing asset management).

“The human element is vital to understanding how retirees manage – or mis-manage – their savings and critical to designing better solutions and policies,” explained Benartzi at the time.

Of course, Bill Gross and Mohamed El-Erian themselves provided such an intellectual edge for Allianz and they will leave large shoes for Gaffney to fill.

A spokesperson for Allianz could not immediately be reached for comment. A Pimco spokesperson declined to comment for this story. 

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