Allianz cuts growth target for money management unit

Allianz SE, owner of the world's second-biggest asset management business after BlackRock (BLK) Inc. (BLK), is trimming targets for that unit as Europe's debt crisis crimps investment returns.

The company is targeting annual asset growth of 5% to 10% “over a full market cycle,” Jay Ralph, Allianz management board member responsible for asset management, said in an interview in Munich. The previous target of 10%, derived equally from market gains and client inflows, is no longer achievable, he said.

“Today's market environment won't allow the same level of market performance as in the past,” said Mr. Ralph, who headed the insurer's business in North America before taking over from Joachim Faber this year.

Asset management's contribution to the operating profit of Europe's biggest insurer almost tripled to 27% in the past five years. Growth was driven by Pacific Investment Management Co., the money manager led by Mohamed El-Erian and Bill Gross that Allianz acquired more than a decade ago. PIMCO, which gained assets in the second quarter while those at BlackRock declined, is seeking to attract more European clients after Allianz granted the division more independence last year.

“PIMCO is an impressive success story for Allianz, especially as many other asset managers seem to face difficulties,” said Philipp Haessler, an analyst at Equinet AG in Frankfurt. “Asset management has been a good hedge for Allianz when its insurance operations are burdened by low investment returns.”

Assets climb

Total assets at Allianz Asset Management climbed 16% to €1.75 trillion ($2.16 trillion) in the second quarter from a year earlier. PIMCO, which accounted for almost 82% of those assets and an even bigger share of operating profit, was separated from the insurer's other managers in September 2012 to give the Newport Beach, Calif., unit more independence as it expands into equities.

“We have not lost a single client as a result of the new setup of our asset management unit, which is better than we anticipated,” Mr. Ralph said.

Asset gains at PIMCO contrast with a 3% drop in BlackRock (BLK)'s assets to $3.56 trillion in the second quarter after market losses totaling $76.2 billion and client redemptions of $29.4 billion.

Mr. Gross' Total Return Fund, the world's biggest bond fund, attracted $2.1 billion in July. The seventh straight month of net deposits into the mutual fund contributed to $8 billion in new cash for the year through July 31, according to Chicago-based Morningstar Inc.

Clients have pulled more than $130 billion over the past 21/2 years from AllianceBernstein (AB) Holding LP, the New York-based fund-management unit of AXA SA, Europe's second- biggest insurer. That included outflows of €5.2 billion in the first half, Paris-based AXA said on Aug. 3.

“While fixed-income-heavy PIMCO clearly benefits from the declining interest rates that we've seen over the last years, it remains to be seen how they will do once this trend reverses,” said Mr. Haessler of Equinet.

No inflation concerns

Inflation, which may accelerate as European leaders seek to resolve the region's debt crisis, is not a concern for PIMCO's business, Mr. Ralph said.

“PIMCO has been particularly good in taking their clients from core fixed-income products to various non-core products such as inflation-protected or real-return oriented strategies that protect clients from inflation,” he said.

Allianz Global Investors, the remainder of the insurer's asset management business led by Elizabeth Corley, announced plans to cut costs as it integrates international business units and creates three European hubs in London, Paris and Frankfurt. AGI, with €291 billion in assets under management, had a cost-income ratio, a measure of efficiency, of 69.3% at the end of June compared with PIMCO's 52.9%.

“AGI has already done a lot of good work on the cost side,” Mr. Ralph said. “While quarters may move around a bit, it's absolutely clear that the cost-income ratio will be trending down.”

PIMCO already has an “outstanding” cost-income ratio and therefore will focus on further growth, Mr. Ralph said.

“PIMCO's strong, yet improving, cost-income ratio will help it preserve its competitive advantage too and suggests it is successfully leveraging its scale,” said Andrew Broadfield, an analyst with Barclays PLC in London. “For Allianz, owning such a successful asset manager is a good business hedge, should life insurers lose share of the savings market to asset managers, as they have in many of the mature markets.”

Mr. Ralph said Messsrs. Gross and El-Erian remain committed to their parent. “PIMCO feels very comfortable within the Allianz group, as do Bill and Mohamed, therefore I don't foresee any changes to our two asset manager strategy or their commitment to the current setup.”