Wednesday, 18 July 2018

On ski bunnies, Allianz and El Erian

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Anthony Peters looks beyond the WEF to mull the change at PIMCO.

Good luck to the 3,000-odd attendees of the World Economic Forum in Davos in their attempt to reshape the world – I shall stick with my Galilean assertion that it is and will remain round, irrespective of what the great and the good have to say – but I note with interest that no more than 15% of the delegates are women.

I have heard all the usual moaning about under-representation but feel that I’d rather congratulate the females of the species for evidently finding that they have more important things to do than to support the economy of a medium sized ski resort in Switzerland during the in-between season which are these dog-days of January.

A certain amount of reshaping has in fact taken place but elsewhere; in Newport Beach, California, to be precise where Mohamed El Erian, CEO and co-CIO of PIMCO has resigned. Mr. El Erian was the anointed heir to Bill Gross, founder of the company and its rather dictatorial leader and his rather sudden departure puts a bit of a question mark over the future of the US$1.9trn money management group.

Has El Erian been pulled out of PIMCO in order to find a big and powerful equity house to bolt on to Allianz or possibly to drive an assault on equities through an existing platform?

It would be fatuous to even suggest that PIMCO doesn’t have enough strength in depth needed to prosper without its Number One and a Half but this must come as a significant personal blow to Mr.Gross for whom bringing El Erian on board had been the single most important act of succession planning. Mind you, in as much as it is said that nobody knows what goes on behind other people’s bedroom doors, so we don’t know what the atmosphere was in PIMCO’s boardroom and, more to the point, what the relationship has been with its owner, the German Allianz AG.

The fact that all the replacements have been announced must lead to the conclusion that the departure was planned but kept under wraps. El Erian retains his role on Allianz’s Executive Committee so he has broken with Gross but not with Michael Diekmann, the parent company’s chairman. Not entirely surprisingly, this has me thinking.

Risky business

The cultural differences between German insurance executives and West Coast money managers couldn’t be more different. I covered Allianz’s Munich based asset management business at the time at which it bought PIMCO and watched on as some of its executives were parachuted into Germany in order to take control of the asset management business. At the time Allianz still owned Dresdner Bank and some of the comments which came back from the Yanks with respect to how that business was being run cannot really be repeated in polite company. As far as they were concerned,  insurance, banking and asset management were all broadly the same, distinguished only by the method in which assets were gathered. PIMCO’s risk evaluation and management models nearly died of heart failure when they were applied to Dresdner’s books and, as we subsequently discovered, they were not wrong in the slightest.

The reverse take-over in the asset management business was total and not unlike the one which affected UBS AM when the bank bought Brinson Partners in 1998. One senior Zurich based UBS money manager who utterly hated Gary Brinson’s brashness commented at the time that they were all no longer fund managers but “GIs” which stood for “Gary’s Implementers”. His tenure at the firm was over by the end of 2000 and by 2003 the Brinson name had been dropped.

Allianz has certainly done much better with PIMCO than UBS did with Brinson Partners or than Zurich Insurance did with Scudder, Stephens and Clark and with Kemper Investments. Still, I do wonder whether Mr El Erian’s exit from Newport Beach but maintenance of his position in Munich might not be pointing towards altered plans for future relationship – even possibly some disengagement between the two businesses. As I said, you never know what might be going on behind other people’s boardroom or bedroom doors but if you hear moaning you know there’s something afoot.

PIMCO’s AUM have taken a hit in the past year which is, given that it’s primarily a fixed income house, no great surprise. The benchmark Total Return Fund alone has lost $40bn through redemptions and the firm’s attempts to develop an equity game in order to compensate have been of no more than modest success.

That raises a second question. Has El Erian been pulled out of PIMCO in order to find a big and powerful equity house to bolt on to Allianz or possibly to drive an assault on equities through an existing platform?

The questions are manifold but we will have to sit back and see. One thing that seems almost certain to me is that Mohamed El Erian is not about to ride off into the sunset. I’m sorry but to me this is all of far more immediate interest than how 3,000 ski bunnies want to reshape the world without ironing out the Alps. 

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