Pimco's Billions Plugging the Hole

Allianz’s U.S. fixed-income subsidiary Pimco has seen more than $100 billion in cash leave five of its funds since the start of this year.
Funds at Pimco are fast losing value.

Few companies would like to see the back of 2014  more than Pimco, the U.S. subsidiary of German insurer Allianz and one of the largest fixed income investment houses in the world.

It’s been a troubled year for the California-based asset manager, to say the least. A new report from analysts at U.S. research firm Morningstar estimated that five of its funds have seen investors withdraw a total of $109 billion between January and October as Pimco dealt with falling bond prices and the departure of its two star fund managers, Mohamed El-Erian and Bill Gross.

Investors pulled a total of $75.1 billion alone out of Pimco’s Total Return Fund, its flagship fund that was managed by the legendary bond investor Mr. Gross until he abruptly left the helm of the company on September 26.

The five funds are among the 10 biggest losers of investor-backing in the United States this year, according to Morningstar. Nearly half of the outflows took place in September and October.

This year’s troubles began with the acrimonious departure in early 2014 of Mr. El-Erian, who had once been designated the successor of Pimco’s founder and chief investment officer, Mr. Gross.

After Mr. Gross's own depature in September came news from Allianz’s chief executive Michael Diekmann, who in October unexpectedly announced he would not be seeking a contract extension after leading the German insurer since 2003. The company has said his departure is for personal reasons and unrelated to the troubles at Pimco, which made up about 7 percent of the insurer’s €110 billion ($137 billion)  in revenue in 2013.

 

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A number of the big losers at Pimco are funds once managed by Mr. Gross, including the Unconstrained Bond Fund, which has lost $13.6 billion this year. Pimco has been counting on the latter as an alternative to the Total Return Fund, because as an “unconstrained” fund it can invest in everything from developed country bonds to credit default swaps, thereby creating higher returns for investors.

Achieving higher returns will be key for Pimco going forward. The company has lagged competitors this year as the U.S. economy began to grow again in the aftermath of the financial crisis. That has allowed investors to regain their appetite for risk and lowered the price of the kinds of safe bonds that Pimco has long profited from.

Pimco’s struggles already began last year with the turnaround in interest rates on U.S. capital markets. It caught Mr. Gross, who for decades had found success investing in bonds, on the wrong foot. The Total Return Fund he managed began foundering compared to competitors and saw significant withdrawals by investors.

Funds not managed by Mr. Gross also took a hit this year. Among the big losers were a high-yield fund and a fund indexed to emerging market bonds, which saw nearly $10 billion in outflows.

Achieving higher returns will be key for Pimco going forward. The company has lagged competitors this year as the U.S. economy began to grow again.

With more than $1.8 trillion in assets under management, Pimco itself remains confident it has weathered the storm. Its new chief Douglas Hodge noted in an interview with Handelsblatt in November that 95 percent of its customers have maintained their investments with Pimco.

The Total Return Fund also remains one of the largest funds in the world, with a current volume of just under $200 billion. Moreover, analysts including Morningstar have remained bullish on Pimco’s prospects.

Parent company Allianz has also continued to express confidence in its U.S. subsidiary, with chief financial officer Dieter Wemmer last month saying the level of outflows after Mr. Gross’ departure was within its expectations.

The German insurer can afford to be patient. Strong earnings in other parts of its insurance business have given it a large capital cushion to weather any potential losses. Allianz posted operative earnings of €2.65 billion in the July-September period despite the troubles at Pimco.

Even for its flagship Total Return fund, the situation is not as dire as it might seem – nearly a third of its assets are in liquid investments, meaning it can quickly sell investments if it must to deal with the outflows from investors.

Morningstar also noted that the investor withdrawals from Pimco have eased considerably in the past month. Pimco itself has said that outflows, which were running at $3 billion a day in late September, had fallen to $1 billion by the end of October. The yield from the flagship Total Return Fund has also been above-average of late. There are signs of hope yet for Pimco.

 

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Astrid Dörner is part of Handelsblatt's team of correspondents covering finance in New York. Anke Rezmer covers the investment fund industry for Handelsblatt out of Frankfurt, Germany's finance capital. Christopher Cermak is an editor at Handelsblatt Global Edition in Berlin and has worked as a finance and general news reporter in Washington D.C. and Frankfurt. To contact the authors: [email protected], [email protected] and [email protected].