As the financial planning industry looks for new investment strategies that will also protect principal, Pacific Investment Management Co., the Newport Beach, Calif., bond giant, aims to lead the way-and, at the same time, become a major broker-dealer. "They are way ahead of the market," says Marty Kurtz, founder and president of The Planning Center, a fee-only financial planning firm in Moline, Ill., and president of the FPA.
Over the past year and a half, the company has introduced several innovations. For example, it rolled out its first actively managed stock fund, the Pimco EqS Pathfinder Fund.
It also enhanced the preexisting Pimco Real Income Fund, which offers bond ladders comprising Treasury inflation-protected securities, with longevity insurance from MetLife that kicks in at age 85, according to Stacy Schaus, a senior vice president who leads the firm's defined-contribution practice. But the biggest announcement came in February, when it launched its new broker-dealer division, Pimco Investments.
THE NEW B-D
The firm has cut expense ratios on its mutual funds, hired an emerging-markets stock analyst in London, beefed up research resources to advisors and made its investment managers more accessible-all to pave the way for Pimco Investments. A division of the asset manaement business, it will distribute Pimco's 55 mutual funds, 13 ETFs and other investment products.
"Our distribution platform serves more than 90,000 financial advisors who work with millions of individual investors throughout the country," says Jon Short, a managing director and head of the firm's global wealth management business, who now also chairs Pimco Investments. "Our focus is on delivering the best investment management services in the world to investors from all walks of life."
Pimco Investments will focus on registered representatives who are regulated by FINRA, Short says. The company has a team of about 140 internal and external consultants who will work with those FINRA advisors. But industry observers say the new broker-dealer is likely to attract a fair amount of admiration and tire kicking from independent advisors as well.
Pimco's reputation and expertise in fixed income gives it a head start in meeting the new investment agenda-protecting client assets from the unsettling ups and downs of increasingly complex financial markets. At around 1,324 in early March, the S&P 500 has almost doubled in value from its low in March 2009, prompting earnest debate about whether we're in a true bull market, or a cyclical one.
Also in early March, 10-year Treasury rates were yielding about 3.4%. Historically, this benchmark for the bond market has yielded between 6.5% and 7.5%, says Geoff Bobroff, an independent mutual fund consultant in East Greenwich, R.I. But after a long period of low stock returns and a bond bull, inflation is likely to erode bond values.
"A lot of people are asking, 'What can I do differently to protect clients?'" Kurtz says. Pimco has already won much admiration-and some business for Pimco Investments-from financial planners. Kurtz says that as fiduciaries, he and other advisors are looking for opportunities that could benefit clients but will wait to see how the new venture performs before jumping in. "All of these changes are extremely important for financial planners to keep up on," Kurtz says.
Other bond experts are looking for ways to serve retirees and other investors interested in protecting principal while seeking growth. Nuveen Asset Management, known for its municipal bonds, bought the First American Equity Income Fund and converted it to Nuveen Equity Income Fund last July. In December, Loomis Sayles & Co. launched the Loomis Sayles Absolute Strategies fund, a global absolute return-oriented fixed-income fund that uses long-short strategies to guard against, among other risks, movements in interest rates.
MOVING INTO STOCKS
Pimco, which is owned by Allianz Global Investors, will remain primarily a bond provider, but stocks will be key to the new broker-dealer strategy. The firm must change to flourish in a period of inflationary interest rates, Bobroff says.
Bill Gross, Pimco's founder and co-chief investment officer, manages Pimco Total Return, the largest mutual fund, with $239 billion in assets. Investors diversifying their portfolios would usually choose fixed-income funds from Pimco and equity funds from its parent company, Allianz Global Investors, which itself is a unit of Allianz, the German global financial services company. In 2010, Pimco accounted for $156 billion in fixed-income deposits at Allianz, almost all of thecompany's fixed-income deposits.
That arrangement ended in April 2010, however, when Pimco launched the Pimco EqS Pathfinder fund. It has a global deep-value strategy that focuses on stocks trading at significant discounts to their intrinsic value, Short says.
The goal is to find securities trading at 60 cents that managers believe are worth a dollar. "The managers apply fundamental, bottom-up analysis to help them identify mispriced securities, with the goal of outperforming broad equity markets over the long term with lower volatility," Short explains
Pimco's approach to equity investing doesn't stop at buying traditional stocks, at least not in the Pathfinder fund. Chuck Lahr, Pimco's executive vice president and a global equity portfolio manager, says distressed debt and some merger arbitrage opportunities will be part of the strategy. Merger arbitrage is a hedge fund strategy in which the stocks of two merging companies are bought and sold to create profits without risk-or at least as little as the jittery markets can stand at this point.
"Distressed debt isn't as exotic as it may sound, and the dynamics are very equity-like," Lahr explains. "There's not a whit of difference between how we analyze the value of a distressed debt opportunity and equity; both are based on solid fundamental analysis."
One sign of Pimco's commitment to stocks came when, in October, it hired Executive Vice President Maria Gordon as its London-based emerging-markets equity portfolio manager. But the biggest challenge is the firm's lack of a track record in stocks.
Although the Pathfinder fund has $920 million in total assets, it won't get its Morningstar rating until 2013, because the firm requires a three-year history. A Morningstar rating is generally a must for financial planners, Bobroff says.
THE DC PIECE
In another sign of the economic times, Pimco is also looking hard at getting a bigger slice of the defined-contribution (DC) pie. The company already designs products and strategies for company retirement plans, according to Schaus, and Pimco says its products will offer a more conservative risk-managed approach for DC plan participants.
Pimco Investments will help get that message out to plan sponsors and advisors, Schaus says. "The commitment to retirement is strong, and we have the capability to reach all parts of the market now," she says. "That will open the door to more innovative and comprehensive solutions for advisors and their clients."
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