Pimco, a fund management group with a stellar reputation in America and a good record in the institutional market, is finding the British retail market hard to crack, writes James Phillipps.
Pimco may well just be the biggest fund management group that you have never heard of.
The American-based fixed income specialist set up its headquarters in London 10 years ago and Pimco Europe now has €64 billion (£50.6 billion) of assets under management, with Britain accounting for more than a third of these at €23billion. Globally, it manages a staggering $829.5 billion (£460 billion).
So why has it flown under the radar of most British IFAs for so long?The firm’s business is split almost equally between running its own funds and managing portfolios for third parties on a sub-advisory basis. It had historically focused on the institutional market, running fixed income mandates for defined benefit pension schemes, but as companies started to migrate to defined contribution (DC) arrangements at the start of the decade, Pimco switched its focus accordingly.
The growth of DC pension schemes was a key factor in the development of open architecture as insurers looked to offer a wider range of investment options to their clients.
“We recognised a while ago that there was a real opportunity to work with a lot of institutions, insurance companies and multi-managers and that they offered us extremely attractive distribution channels to their clients,” says Kevin Kuhner, senior vice-president and co-head of Pimco’s European distribution team. “The move to DC benefited us because as the pension market grew more competitive it forced these institutions to open up their platforms to offer best of breed funds to their clients.”
Pimco was therefore able to begin marketing its own products through these channels and now has 33 funds within its Dublin-based Global Investor Series (GIS) Oeic. This comprehensive range of fixed income funds covers virtually every type of strategy across both the regional and global government, corporate and high-yield debt markets.
In 2000 Pimco was taken over by Allianz Global Investors (AGI), giving it a more direct route to the retail market. It runs three co-branded funds for the group: the Allianz Pimco Gilt Yield, Sterling Total Return and UK Corporate Bond funds.
However, the institutional and sub-advisory markets continue to be Pimco’s main source of inflows. On the sub-advisory – or “remarketing” side – it runs the global bond portion of the Skandia Global Fixed Interest Blend fund and also operates a mandate for GAM, among others.
Kuhner says the sub-advisory route is not simply an easier option for fund houses without a strong retail presence to leverage their stronger brand in the institutional market. He stresses that the margins are the same. “We are paid the same management fee whether it is from a sub-advisory or mutual fund,” he says. “In many ways it takes more work to run a sub-advisory account. Although the client registers the fund and has the board of directors, we have to work with the clients on an individual basis.”
One reason for Pimco’s small retail footprint is the size of its sales and marketing team. Eight people cover the whole of Europe, so it is no great surprise that the predominant focus is on large multinationals and regional institutions.
“There are a couple of ways in which we are trying to address that,” Kuhner says. “We do not have salespeople all over the country working with individual IFAs, but we work closely with AGI, which does have teams speaking to advisers around the UK, making sure that the Pimco story is told.”
The group’s marketing tends to be less high profile than that of many of its peers but Kuhner says Pimco’s brand recognition is gathering momentum. “There are several ways in which we are building brand awareness, such as through articles in the press, advertising and TV interviews. We have also participated in some of the major platforms’ roadshows and are trying to get the brand established across a variety of markets.”
Pimco has also embraced new media – fund manager Paul McCulley’s global central bank focus podcast is ranked 56 in the iTunes podcast chart, one spot above Fidelity, its American rival.
Kuhner admits that the group has found the IFA market hard to crack, but Pimco’s huge success in the institutional and sub-advisory markets has far exceeded what other American giants such as Legg Mason and MFS have achieved this side of the Atlantic. “The IFA channel has been a bit more of a challenge to us and very different to an institution, such as a big bank, which has centralised decision-making,” he says. “The IFA market is a work in progress and takes a lot more time and a lot of commitment.”
Mark Dampier, head of research at Hargreaves Lansdown (HL), expects Pimco’s retail quest to be an uphill struggle in terms of both brand and performance. “Their brand is very strong in the US but it is unknown here, probably even among IFAs,” he says. Most of what we know of it is through the Allianz funds it manages, and some of them have actually not done that well.”
In fact HL dumped the £135.2m Allianz Pimco Sterling Total Return fund from its Wealth 150 panel last month. The fund, managed by Mike Amey, has fallen by 3% over three years compared with a sector average decline of 2.2% and over one year it also lagged, down 3.3% against the peer group’s 3.1% fall.
HL senior analyst Alexander Davies felt the fund was wrongly positioned in the Other Bond sector. “We are not certain this sector truly reflects the fund’s investment profile,” he says. “Instead we compared the fund to the UK Corporate Bond sector, where the funds tend to have greater exposure to higher-quality bonds. Even when compared to this sector the fund performed worse than average over most periods.”
However, Davies recommends holding rather than selling the fund because, given its resources, “Pimco may have the ability to turn this fund around”.
Kuhner admits that performance was hit by the fund moving a little early to reduce credit exposure in 2006 to 2007, but says the position paid off through the second half of 2007 and this year as spreads widened when the credit crunch bit.
It certainly would be wrong to dismiss the Allianz Pimco range because it does contain a real gem. The Gilt Yield fund, also managed by Amey, is top of its sector, having bulldozed its peers over one, three and five years. The longer the time-frame, the higher the outperformance: over 12 months it is up 8.8% versus the sector average of 5.1%, over three years it has returned 12.7% against a peer return of 6.8%, and over five years it has delivered an impressive 25.6% compared with an 18.1% sector average. The third portfolio in the range, the Sterling Total Return fund, has delivered consistent relative outperformance, declining by 3% compared with the peer group’s fall of 4.2% over three years, and down 2.5% against the sector average decline of 3% over one year.
Pimco’s mammoth Dublin range paints a mixed picture. Of the 12 funds with three- year track records, three are first quartile but four funds apiece reside in the third and fourth quartiles, according to Morningstar. Kuhner says the Pimco GIS Total Return Bond fund, which invests across the fixed income strata, is its flagship vehicle. Its performance has been impressive, up 22.14% over three years, ranking it third among 120 peers, and over one year it is up 24.9%, sitting fourth out of 132 funds.
What is a concern for the domestic investor is that two of the group’s British investment grade bond funds languish at or near the bottom of their sectors over three years.
The one-year numbers make better reading with 14 Pimco funds all first quartile. Of the remainder, five are second quartile, seven are third and only three are bottom quartile. The top-quartile performers cover a range of fixed income strategies.
There is little doubt that with over 1,000 employees spread across nine offices globally, Pimco houses a lot of talent. However, whether many advisers will look beyond the Allianz Pimco range to its more specialist Dublin range is open to question.
Brand is important because it provides comfort to clients. Pimco will be hard-pushed to translate its stellar reputation in America into the British retail market, meaning its ongoing success is likely to remain tied to the institutional and sub-advisory channels, where it does pack a mighty punch.
PIMCO is a fixed income specialist based in America which has $829.5 billion (£460 billion) of assets under management worldwide. Its parent group is Allianz Global Investors. Pimco Europe has its headquarters in London and has assets under management of £50.6 billion.
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The best and worst funds for each group profiled in the Focus are shown on a relative rather than absolute basis. Until recently, the best and worst funds were defined in absolute terms. But the percentile ranking of a group’s funds are now shown relative to their respective sectors.