Pimco’s retail push includes expense ratio cuts

As Pimco takes over the distribution of all its funds and expands its equity fund lineup, it plans to cut expense ratios and arm financial advisers with more research and access to its investment managers

As Pimco takes over the distribution of all its funds and expands its equity fund lineup, it plans to cut expense ratios and arm financial advisers with more research and access to its investment managers.

The moves are part of Pacific Investment Management Co. LLC’s effort to be a bigger player in the retail arena, said Jon Short, chairman and managing director of the firm’s new broker-dealer, Pimco Investments, which expects to receive regulatory approval by the end of March.

He declined to quantify how much expense ratios will be cut.

U.S. mutual fund assets at Pimco, a subsidiary of insurer Allianz SE, have ballooned over the past few years, hitting $497 billion at the end of 2010. The firm’s most popular offering, its $240.7 billion Total Return Fund, had more than $25 billion in inflows last year, topping all other funds.

Despite its plans to cut costs, some observers think that Pimco may have a hard time cracking the ice with broker-dealers.

“They are an unknown in the equity space, and funds don’t see flows until they have strong three-year track records,” said Geoff Bobroff, a mutual fund consultant.

Given that fixed income — Pimco’s longtime speciality — is falling out of favor, its timing may be off, he said.

“Their funds tend to be more nimble than their peers, but telling someone that you are down 3% when everyone else is down 10% isn’t going to sell funds,” Mr. Bobroff said.

But Pimco thinks that its long-standing presence in the institutional market will help it with broker-dealers, said Douglas Hodge, the firm’s chief operating officer.

NO SPECIFIC TARGET

“We already have been talking with the distribution firms like Morgan Stanley [Smith Barney LLC], but we have direct relationships with the home office, and now we want to distribute through their distribution networks,” he said.

About 40% of Pimco’s assets are in retail accounts.

“We don’t have a specific target for where we want that to be, but we do anticipate retail growth will be faster than growth in the institutional business,” Mr. Hodge said.

After launching its first actively managed equity fund, the Pimco Pathfinder Fund, last April, the launching of an internal broker-dealer was the next crucial step in Pimco’s effort to gain a greater retail presence.

Once it gets regulatory approval, more than 170 sales representatives from Allianz will move over to it. Once it is fully staffed, Pimco Investments will have 70 to 75 external wholesalers, which it calls “adviser consultants,” and an equal number of internal wholesalers.

“Starting up a broker-dealer is the biggest thing they have done, second only to getting into equities,” said Eric Jacobson, director of fixed-income research at Morningstar Inc. “They might build out a great equity product line, but if they don’t have good distribution, it doesn’t matter.”

To help attract advisers, Pimco plans to cut expenses on its funds within the next six months, Mr. Short said.

Lower costs will be an important element in gaining assets as equity markets start to pick up, he said.

Although the fixed-income giant did well after the financial crisis, now that bonds are falling from favor, more investors will notice that Pimco’s funds are more expensive than their peers, said Russel Kinnel, director of research at Morningstar Inc.

“The retail shares of all of their bond funds have been too pricey,” he said.

MORE EXPENSIVE

For example, the average expense ratio for Pimco’s inflation-protected-bond funds is 1.19%, compared with an average of 1.01% for its peers, according to Morningstar. The average expense ratio for Pimco’s intermediate-term-bond funds is 1.22%, compared with an average of 1.13% for its peers.

“Allianz never tried very hard to give people a good deal on the retail shares, and although Pimco has seen massive inflows, those A and D shares are fairly small in assets,” Mr. Kinnel said.

D shares are Pimco’s no-load retail shares.

There are $18 billion in D shares of the Total Return Fund, while A shares have $26 billion, according to Morningstar.

“There is more money there if they want to be more aggressive in pursuing it,” Mr. Kinnel said.

By not having to go through Allianz to reach advisers, Pimco hopes to be able to communicate with them directly and offer access to Pimco’s research and investment managers, Mr. Short said.

“We have a lot of opportunities now to create written content for financial advisers, as well as provide them with more-direct interaction with our thought leaders,” he said.

For Allianz wholesalers, the separation may prove difficult, observers said. Although Allianz contends that its representatives will be able to focus more on its other smaller asset managers, some questioned whether reps will have as easy a time getting in front of advisers if they don’t have Pimco funds to sell.

“That is certainly a question at this point,” said Katie Rushkewicz, an analyst at Morningstar. “The Pimco name obviously carries a lot of star power.”

‘SIGNIFICANT’ BRAND

Allianz isn’t worried that no longer having Pimco to sell will affect its wholesalers’ ability to talk to advisers, said Brian Gaffney, chief executive of Allianz Global Investors Distributors LLC.

“It might be a little harder because the Pimco brand is so significant,” he said. “But we have to earn the trust of advisers every day.”

And given the uptick in the equity markets, now is as good a time as any for the firm’s wholesalers to be selling equity funds from Allianz managers, Mr. Gaffney said.

In fact, Allianz hopes that with Pimco’s separation, its wholesalers will be able to devote more time to its other managers, Mr. Gaffney said.

“This has been something we have been discussing for years,” he said.

Allianz has consolidated its subsidiaries NFJ Investment Group LLC, Nicholas-Applegate Capital Management LLC and Oppenheimer Capital LLC under the Allianz Global Investors Capital brand. It also still has RCM Capital Management LLC.

As Pimco grew, it became clearer that the wholesalers needed to spend more time on its products, Mr. Gaffney said.

“Pimco needed more dedication,” he said.

As it focused sales efforts on Pimco, Allianz lost talent at the other B-Ds.

Last March, Jerry Thunelius, the head of fixed income at Oppenheimer Capital, took his $2.1 billion bond team to join TCP Global Investment Management LLP. At the time, one insider said that Mr. Thunelius left because he felt his team couldn’t compete for resources against Pimco.

Mr. Thunelius didn’t return calls seeking comment.

One question that remains is, how Allianz will handle Pimco’s expanding its equity fund lineup, thus competing directly with its own wholesalers.

“It’s going to be a while before Pimco builds out its equity funds and has a three-year track record to capture assets,” Mr. Gaffney said. “We expect we will be working more cooperatively than competitively with them in the near future.”

E-mail Jessica Toonkel at [email protected].