PIMCO expanded into equities in 2009 for the same reason Noah built the ark before the rain. The "rain" for fixed income is the end of the 30-year bull market, which saw the 10-year yield fell to 1.4% in July 2012.
I'm not saying PIMCO should abandon its focus on fixed income, or that it won't continue to deliver superior performance in this area. Just the opposite, in fact. As falling interest rates will no longer provide a return tailwind, institutional and individual investors should begin to reach for "alpha" generated by active management after being content with "beta" from passive management for so long.
One
Provide a clear and consistent message explaining the value proposition of PIMCO equity products that emphasizes the following key assets.
A high level of trust and name recognition. Contrary to popular belief, the No. 1 fear of consultants, fiduciaries, and advisors isn't death. It's losing a client as a result of recommending an unheard of manager that performs poorly.
Institutional class infrastructure. Few managers can match the global scale, deep bench, cross-asset research capabilities, and client service of PIMCO.
A focus on risk management, not just absolute performance. While every manager claims to do this, few actually do as evidenced by the poor performance in 2008. PIMCO manages risk on multiple levels, including a focus on value (which is inherently risk-averse), tail-risk hedging (this is a "performance drag" the same way homeowner's insurance is a "drag on your finances" until your house burns down), lower volatility, as well as an emphasis on a repeatable investment decision-making process.
By preserving assets during the inevitable bear markets, PIMCO can leverage the trust earned into increased fund flows and higher management fees. Moreover, these assets are much "stickier" as investors are less likely to leave during temporary periods of under performance.
The fall of Janus (JNS +0.00%) after the bursting of the tech bubble is a reminder of the perils of ignoring risk and going all-in in one sector. For example, despite a better-than-expected recovery, the current assets under management, or AUM, of about $167 billion is almost half of the average AUM of about $300 billion in 2000. Janus even hired a former PIMCO chief operating officer to build out its fixed-income department.
Janus is less desperate to sell to a larger manager after Japan's second largest life insurer, Dai-ichi Life Insurance, bought 20% of the company.
I am aware PIMCO already excels in the area of client communications. This suggestion is merely to stress its importance by providing context. The recent hiring of Virginie Maisonneuve from Schroders should provide much-needed stability and direction after its former head of equities left for the less than greener pastures of politics.
Two
Reduce the expense ratio temporarily by a significant amount to encourage inflows. PIMCO would not miss the management fees since its four main equity funds represent less than about 1% of total AUM.
Three
Pledge to cap expense ratios at a maximum absolute level and as a percentage of AUM. This can reduce the threat from passive and active products.
Four
Strengthen relationship with retail advisors. Retail does not earn nearly the respect it deserves despite having two significant advantages compared to institutional assets. First, the fees charged are typically higher. Second, the decision to invest is typically made in days or weeks, not months.
Five
Focus on quality, not quantity, when it comes to wholesalers. Over the long term, a smaller group of wholesalers focused on the highest-producing advisors, and armed with the best support (e.g., internal, client service, marketing budget) and the greatest monetary incentives, it will be more effective than a larger sales force using a "spray and pray" approach. Many advisors won't recommend a product if they don't like the wholesaler. Sad but true.
The most successful advisors make a conscious decision to only work with a few partners in each asset class. If PIMCO can become one of these trusted partners, it should enjoy even greater asset "stickiness."
Six
Aggressively market to 401(k) providers. The opportunity here can't be overstated. Many fund families enjoy high and recurring fund flows just for being on a 401(k) platform. PIMCO should be able to leverage its brand name with Total Return like Fidelity did with Magellan. The growing use of "open architecture" 401(k) plans should help an industry leader like PIMCO stand out from hundreds of other fund families.
Seven
If you can't beat 'em, buy 'em. Although PIMCO prefers to grow organically, if it is unable to meaningfully grow equity AUM within a reasonable time frame, it may want to consider buying an equity manager. There is precedent for a manager changing its growth strategy. Aberdeen, another manager that preferred to grow organically, recently acquired Scottish Widows Investment Partnership for $903 million.
Manning & Napier (MN +0.00%) would be an excellent fit for PIMCO for three reasons. First, Manning & Napier has a similarly long operating history given that it was founded only a year earlier than PIMCO in 1970.
Second, Manning & Napier is relatively inexpensive from a valuation standpoint given that it trades at only ~0.50% of AUM compared to 1%-3% for many other managers.
Third, PIMCO would be able to significantly reduce many of the back office, distribution, servicing, and custody expenses because of its large economies of scale.
Bottom line
The end of the bond bull market is hardly the end for PIMCO. Investors should closely monitor PIMCO's progress as several other managers may follow its lead. Moreover, publicly traded managers with a niche focus and low valuation are potential acquisition candidates for larger managers looking to quickly fill gaps in their product offerings.
