Fidelity, known for equities in the 90s, did it with its move into bond funds. Janus, known as a growth shop during the tech boom, was able to do it with its move into mixed-asset funds. Now Pimco is launching a new fund line in equities. Of course, the bond fund giant tried to make the same move a decade ago—and failed. Will it succeed this time?
Pimco has become a household name in the bond business. It’s the fourth largest mutual fund family in the country, with about $416 billion in retail assets under management as of December, according to Morningstar. Its Pimco Total Return Fund (PTTAX) has over $240 billion in assets. While the power of its brand will help it attract investors to the new equity funds, it may also hurt the firm in the process. Investor expectations will likely be pretty high given the firm’s track record, and it will have to do well in equities or risk tarnishing its reputation, said Jeff Tjornehoj, head of research, Americas, at Lipper.
Pimco took a stab at equities in 1999 when it established Pimco Equity Advisors. But the unit was accused of market timing, and the effort didn’t work out. This time around, the move seems to be measured, calculated and carefully planned, said Virkar.
“They [Pimco] have an analytical culture that lends itself well to discovering opportunities and looking ahead in areas that others often overlook,” said Tjornehoj.
Pimco is also waiting for regulatory approval to establish its own broker-dealer, Pimco Investments, to take over distribution of its products in the U.S. It’s meant, in part, to support the dedicated push into equities, said Veerendra Virkar, research analyst at Financial Research Corp. in Boston. But the move will also give Pimco more independence from parent company Allianz Global Investors, which currently handles its sales distribution.
In April 2010, Pimco made its foray into actively-managed equities with its EqS Pathfinder Fund (PATHX), a global, deep value equity strategy, which already has about $876 million in assets in the U.S. and $1.54 billion in assets globally, according to Morningstar. To manage the fund, Pimco hired Anne Gudefin and Charles Lahr from the Mutual Series Group of Franklin Templeton Investments, where they ran the Franklin Mutual Global Discovery Fund (TEDIX), which has a five-star rating from Morningstar.
Pimco hired other key people in the effort, including Goldman Sachs’ Maria Gordon, who will lead the push into the emerging markets, and Neel Kashkari, who ran the Troubled Asset Relief Program for banks under the Bush administration.
“They have a decent plan,” that favors quality over quantity, said Russel Kinnel, Morningstar’s director of fund research. As opposed to just going out and buying a good equity shop, Pimco has taken a semi-organic approach by trying to build up the equity division itself, although they’re hiring from the outside, Kinnel said. “They’re writing some big checks.”
Franklin Resources, which was largely a bond shop with some growth equity offerings in the early ‘90s, took a different approach to diversification: it acquired Templeton and Mutual Series, adding foreign, emerging markets and U.S. value expertise. According to Kinnel, Franklin’s diversification effort was successful because the firm didn’t try to fold these managers in; for the most part, they were left alone. Franklin paid a premium for some good managers that had well-known funds, and it paid off.
It’s fairly common for mutual fund families to round out their offerings, as a way to keep investors under the same roof and provide good business no matter the weather. Other fund companies that have branched out include Fidelity, an equity shop that went into bonds; Janus, a which diversified away from pure growth into value equity and bonds; and American Funds, which also used to have an equity focus and has strayed into bonds.
But being a diversified fund shop has lost some of its allure since the 1990s because brokers can pull from different fund families as they see fit, said Kinnel. Still, with economies of scale, brand equity, and the infrastructure in place, there is definitely something to be gained in branching out, he added.
The Next Sweet Spot?
For Pimco, the timing couldn’t be better.
“Perhaps Pimco has looked ahead and figured that the fixed income market will be a little flat,” Tjornehoj said.
Bill Gross, founder of Pimco, has been outspoken that he feels the bond market could be in for a turnaround. Bonds have been the sweet spot for the past decade, and the timing could be right to get into equities.
As flows shift toward equities, “they need to diversify to keep the latest investors interested in the brand,” Tjornehoj said.