Rivaling: Andreas Untermann said AllianzGI's relationship with PIMCO is Darwinian in a way.

AllianzGI now competing with sibling PIMCO

Manager working hard to differentiate itself from better-known bond giant

Allianz Global Investors is carving an independent path without its sister subsidiary Pacific Investment Management Co., launching a more integrated business model across asset classes and building its own fixed-income capabilities.

A new business structure separated PIMCO from AllianzGI at the start of the year, allowing for more independence for both.

The changes also increased pressure on AllianzGI to better distinguish its core competencies to become more profitable, sources outside of the firm said, as it no longer enjoys the operating profit generated by PIMCO.

For parent Allianz SE, establishing a more independent AllianzGI that competes with PIMCO could help strengthen the parent company over the long term, according to consultants, analysts and bankers.

“With PIMCO now focusing not only on bonds, but also multiasset and equities, the new (AllianzGI) is also able to offer more fixed-income products,” said Andreas Utermann, the firm's co-head and global chief investment officer based in London.

“We're two independently managed asset management companies,” competing in broadly the same marketplace, Mr. Utermann said. “One doesn't know what the other is going to do. It's Darwinian, in the sense that there's nothing in the (company) structure that will somehow regulate or prevent any competition.”

Key to the new structure are three regional heads — for Europe, Asia-Pacific and the U.S. — responsible for delivering AllianzGI's global product line in a locally relevant way, said Elizabeth Corley, co-head and CEO at AllianzGI based in London. James Dilworth, CEO for Europe; Douglas Eu, CEO for Asia-Pacific; and Brian Gaffney, CEO for the U.S., are also helping to unlock the potential for certain strategies that had only been available in domestic markets.

U.S. high-yield and corporate bond strategies managed by an AllianzGI team based in San Diego is attracting more investors from Asia. “Previously they weren't sold outside the U.S., so nobody (else) knew about them,” Ms. Corley said.

“One of the things we did was to look across the whole world to see what products we have and to match those products with the market opportunity, no matter where they are based.”

Split about even

At AllianzGI, total assets of e302 billion ($384 billion) are split about evenly among fixed income, equities and multiasset strategies.

“Asset management is an important earnings pillar of Allianz (SE),” said Philipp Haessler, an analyst for Equinet AG covering Allianz SE based in Frankfurt. It contributed about a third — or e849 million — of the firm's total operating profit in the third quarter, according to a financial update released Nov. 9. In addition, it's “a bit of a natural hedge” for Allianz's life insurance business, which is negatively affected by a low-interest-rate environment. During the same time, profits from asset management helped to stabilize earnings, he said.

The majority of the parent's operating profit from asset management is generated by PIMCO.

For Allianz SE, “PIMCO is a great success story resulting from the strong performance of bonds, so an increase in interest rates would clearly have a negative impact” on the business, Mr. Haessler said. PIMCO's strong performance track record will help sustain investor interest, but “the big question market is future profitability, since sooner or later, interest rates will go up.”

Others who are familiar with both AllianzGI and PIMCO said the move to separate the two companies had been expected by clients, who largely saw them as separate entities even before the formal split. But it will take time and additional investments to strengthen AllianzGI as an independent manager at a time when cost-cutting pressure is also building industrywide.

“The cost question is a critical question,” AllianzGI's Mr. Utermann said. “We are profitable but clearly we can improve. Part of the benefit of moving from a multisiloed, multiboutique approach toward an integrated company is that there are areas of duplication, which can be removed. Already this year we have started to lower our cost-income ratio, though the benefits of simplification of the business will take longer to come through.”

AllianzGI's cost-income ratio was 76.6% in the quarter ended Sept. 30, compared with PIMCO's 49.2% during the same period.

AllianzGI is not competing on scale, which helps PIMCO achieve a lower cost-income ratio. “You have to be cautious about mass-producing alpha returns, particularly in equities,” Ms. Corley said. “Scale, to a certain degree, has to be managed very carefully.”

Mr. Utermann added, “You don't run a firm via a cost-income ratio, you never do, but you make sure that you've got enough margin left not only to pay shareholders, but also to reinvest in the business.”

For example, as the first to launch a renminbi bond fund, AllianzGI has also been building fixed-income and equities capabilities in Asia. At AllianzGI, “the team is passionate about the renminbi becoming a reserve currency,” Ms. Corley said. “There are questions in the short term, but the long-term trend is very much in favor of a strengthening renminbi,” partly because of the underlying global trade imbalances and GDP trend. In May, AllianzGI launched the Allianz Flexi Asia Bond fund, a strategy in which up to 70% of the portfolio can be invested in high yield.

Other areas in which AllianzGI has been expanding include infrastructure equity and debt and target-date funds for defined contribution plans. Another major area of growth is in “asset-class-neutral,” outcome-oriented strategies, Ms. Corley said.

Good position

Donald H. Putnam, managing partner at San Francisco-based merchant bank Grail Partners LLC, said AllianzGI is in a good position to compete in multiasset strategies. “This could be a particularly good approach” for AllianzGI because the firm's global business already has a broad product line, he said.

“Being smaller and different from PIMCO can also be an advantage,” he added. The company can stand out by being “more nimble and organized differently” than the fixed-income giant.

For a global organization to succeed, it has to be able to deliver locally, Ms. Corley said: “Anybody who believes they can sit in an ivory tower somewhere, pull a big lever and run an asset management business across the world doesn't understand asset management and certainly doesn't understand asset management clients.”

While performance is generally good, AllianzGI needs to further stand out from its competitors, consultants said.

Investment performance improvement is a constant endeavor, Mr. Utermann said. “The bar has been increased over time. It has become much more difficult to outperform, and clients' demand to outperform, rightly, has become more exacting.”

Financial repression has resulted in a market environment that is increasingly correlated, not only within but across asset classes, Mr. Utermann said.

Therefore, outperformance has become more difficult. “A third element adds to the challenge,” Mr. Utermann said. “Many more players have now entered the industry to carve out the cake.”

About 65% of AllianzGI's strategies outperformed their respective benchmarks compared to 61% at the beginning of the year. Performance in some key strategies is turning around.

For example, the firm's global equity strategy outperformed its benchmark by 5.34 percentage points for the year ended Sept. 30, compared with 1.4 percentage points below its benchmark in the year ended Sept. 30, 2011.

“It's a continuous improvement because if you don't improve, you're dead,” Mr. Utermann said. “You've ceased to become relevant.”

This article originally appeared in the November 12, 2012 print issue as, "AllianzGI now competing with sibling PIMCO".