Too passive, too tense

Pimco outflows are a wake-up call for Allianz

Pimco had a terrible first quarter - the same three months in which controversy engulfed the world's largest bond fund and its co-founder Bill Gross. There is a plausible correlation between euro 22 billion of net outflows and the recent public split between Gross and Pimco's now-departed Chief Executive Mohamed El-Erian. For Pimco's parent, German insurer Allianz, the deteriorating financials argue for a more robust management approach.

Founded in 1971 and now with nearly $2 trillion under management, Pimco remains a remarkable success story. Allianz bought it in 2000 and still has reason to feel pleased with its purchase.

Pimco's current difficulties are partly to do with changing investor attitudes to fixed income. A three-decade long bull market in bonds is losing steam and that has led to shifts in investment allocation. Hence Pimco suffered even larger net outflows in the fourth quarter of 2013.

But that is not the whole story. Industry figures collated by research firm EPFR show there were net inflows into global bond portfolios in the first three months of the year. Emerging market bonds and equities had a bad quarter, but that only bolstered general demand for assets in Pimco's core area of expertise. While the first-quarter outflows were only about one per cent of total assets under management, Pimco really ought to have enjoyed net inflows.

In a more challenging environment, Pimco cannot afford questions about its governance. Both Gross and El-Erian enjoy the status of financial superstars. That is helpful for marketing in good times. But when things go awry, problems get amplified through media attention. There is a palpable risk that investors, in increasing numbers, take fright.

Allianz devolves much of the management responsibility for Pimco to the fund's top brass in California. Gross is himself supported by an experienced team. Until now, Pimco has thrived with near total autonomy from its parent. But Allianz's hands-off strategy looks increasingly dubious. It might be time for Gross to take a scaled-back role, and for Allianz to embrace more active management.