Pimco Owner Allianz Backs 'Legend' Gross as Flagship Fund Lags

Sunday, 20 Jul 2014 06:33 PM

 

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Allianz SE, Europe’s biggest insurer and owner of Pacific Investment Management Co., is standing by Chief Investment Officer Bill Gross as his main fund trails peers and struggles with a record streak of investor redemptions, calling him an industry “legend”.

Gross, who runs Newport Beach, California-based Pimco, has given no indication that he will step down and is “even more invigorated” as Pimco begins to improve performance from its biggest fund, Jay Ralph, the German insurer’s management board member responsible for asset management, said in an interview.

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“We want Bill Gross to work as CIO for as long as he is willing and able,” Ralph, 55, said in Munich last week.

Allianz Chief Executive Officer Michael Diekmann was forced to defend Pimco against shareholder criticism during the insurer’s annual meeting in May as Gross is lagging behind rivals for the third year in four and investors have pulled $64 billion from his Pimco Total Return Fund since May 2013. Gross, 70, has also come under scrutiny for his management style since the abrupt resignation in January of former CEO Mohamed El- Erian, whose departure was followed by reports of clashes between the two men. Gross has offered to resign several times over the past seven years, including when El-Erian’s submitted his resignation, the Wall Street Journal reported on July 14.

“Bill never gave us an indication that he wants to resign,” Ralph said. “The only time he is unhappy is if he doesn’t have a day of outstanding performance.”

New Structure

Ralph and Diekmann said they see no reason to tighten control of Pimco’s operations after responding to El-Erian’s departure by naming Douglas Hodge as CEO and appointing six deputy investment chiefs including Daniel Ivascyn, Virginie Maisonneuve and Andrew Balls.

“Bill Gross has always been an outstanding investment manager,” Diekmann said in e-mailed comments to Bloomberg. “We are convinced that he and his team at Pimco are very well positioned to continue to be successful and we fully support the new management structure.”

While Pimco’s total assets under management rose by $53 billion to $1.97 trillion through the first half of the year, the Total Return Fund has shrunk to $225.2 billion as of June 30 from $237 billion in December, according to Chicago-based research company Morningstar Inc.

Gross ‘Invigorated’

The fund advanced 3.7 percent this year through July 17, behind 55 percent of similarly managed funds, according to data compiled by Bloomberg. Over the past month, Pimco Total Return climbed 1 percent, ahead of 96 percent of peers, the data show.

“When I met Bill Gross last week, he was feeling more positive because the investment performance was turning and he’s even more invigorated by the investment discussions today,” Ralph said.

Redemptions at the Total Return Fund are the result of investors shifting from core strategies to non-core strategies, said Ralph, who became a member of Allianz’s management board in 2010 and took the helm at the asset management units in 2012.

“To focus on a single fund, where people’s investment allocations are changing, is the wrong way to look at it,” he said. “Gross is the CIO of the whole firm and manages strategies in addition to the Total Return Fund.”

El-Erian, who left amid clashes with Gross that painted the Pimco co-founder as an autocrat who didn’t tolerate dissent, had shared the role of co-chief investment officer with Gross. He now works for Allianz as chief economic adviser.

The former Pimco CEO helps Allianz by meeting with “key economic, political and business leaders,” according to Ralph. El-Erian also writes a daily column for Bloomberg View, the opinion section of Bloomberg News.

Biggest Shakeup

El-Erian’s departure prompted the biggest management shakeup in Pimco’s history. The scrutiny surrounding the company has also prompted Gross to embrace dissenting views. At investment committee meetings in April and May, four of Gross’s six newly appointed deputy investment chiefs questioned whether their boss was too pessimistic about the economy. Gross said in an interview June 19 that the committee is now more evenly balanced in terms of optimism and pessimism.

“Following the management change, they are now better positioned and it was extremely well received by clients,” said Ralph, who joined Allianz in 1997 from Swiss reinsurance company Zurich Re.

Allianz Asset Management, which also includes Allianz Global Investors, is “on track” to achieve a target of a total operating profit of 2.5 billion euros to 2.9 billion euros this year, Ralph said. That’s below the 3.2 billion euros reported for 2013.

‘No Change’

Gross and Pimco retain independence when it comes to investment decisions and Pimco is treated in the same way as other Allianz units when it comes to governance, Ralph said.

“There has been absolutely no change in terms of the amount of communication” and “there is absolutely nothing that has changed in terms of Pimco’s investment processes or compliance and risk processes,” Ralph said.

Two hundred of 300 people working at Allianz Asset Management sit in offices less than a hundred meters (328 feet) away from Pimco in Newport Beach, Ralph said.

Allianz gave Pimco, which Gross co-founded in 1971, greater independence in 2011 by separating it from the insurer’s other asset managers, now combined under Allianz Global Investors, led by Elizabeth Corley.

Gross has also recruited some of his most trusted allies back to Pimco, including Paul McCulley in a newly created role of chief economist, and Sudi Mariappa, rehired as a generalist fund manager.

“The ultimate test of Pimco’s new leadership structure is the investment performance, and here we see it coming back to where it historically was,” Ralph said.

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