Staff reductions at PIMCO to continue

PIMCO's announcement this month that it is making a 3% cut in its headcount is only the latest, and most public, move in a continuing reduction.

Jennifer Spivey, vice president for corporate communications, said in an e-mail that the firm had 2,299 employees on its payroll as of June 15, down 4.1% from the end of 2015.

That drop does not include personnel affected by the June 16 layoff announcement, including eliminating the entire eight-person dividend investment team.

Ms. Spivey said the earlier reductions of 98 employees had been through attrition. She added that the firm had also hired people in 2016 but didn't provide specifics.

Michael Reid, PIMCO's global head of corporate communications, later clarified that the 98-person reduction earlier in the year also included seven people who had been laid off in PIMCO's product management group.

The staff reductions at Pacific Investment Management Co. LLC come as the firm has seen its assets under management decline more than 25% in the past three years — to $1.498 trillion as of March 31, from $2.044 trillion as of March 31, 2013, data from eVestment, Marietta, Ga., show.

A confluence of events — including performance problems in the firm's flagship strategy, the PIMCO Total Return Fund, where outflows began in mid-2013 — contributed to the AUM decline. The performance issues helped spark turmoil at the firm, which saw the departure of PIMCO CEO and Co-Chief Investment Officer Mohamed El-Erian and PIMCO co-founder and Chief Investment Officer William Gross, fueling further outflows.

And while the outflows seem to be stabilizing as of late, staff reductions at the Newport Beach, Calif., money manager aren't over.

In addition to the layoffs announced this month, PIMCO officials also said they would be offering a voluntary severance package to some U.S.-based employees, but they did not specify to how many employees it would be offered. The decline in assets under management is making the cuts necessary.

“If your assets under management fall 25%, you can't have the same staffing,” said Janie Kass, San Francisco-based managing director at money management consulting firm Margolis/Kass Advisors. “You'll wait a certain amount of time, and then at some point — sooner or later — you'll have to cut some staff.”

PIMCO's owner, Allianz Asset Management, a subsidiary of Munich-based insurer Allianz SE, reported May 10 that operating profit at AAM fell to $527 million for the first three months of 2016, a 17% decline from a year earlier. The Allianz unit also includes a smaller, second asset management company, Allianz Global Investors, which has been experiencing net inflows.

While PIMCO's outflows continued in the quarter, it was at a slower pace, Allianz SE Chief Financial Officer Dieter Wemmer said in a statement in May. “Although we anticipate a challenging environment for the asset management industry, we continue to expect positive net flows at PIMCO in the second half of the year,” Mr. Wemmer said.

Allianz SE officials said in the company's 2015 annual report that “expense discipline” will be a focus for its asset management division in 2016, although it doesn't specifically mention personnel moves.

Ms. Kass doesn't expect many investment personnel layoffs at PIMCO. “You try and cut your investment people as a last resort,” she said.

Cutting the entire dividend investment team was a smart move, Ms. Kass added, because it removes any questions about how well a reduced team would be able to function.

Nick Holmes, a managing director and equity analyst at Societe Generale in London, said in an interview that PIMCO operates at arm's length from Allianz SE, but it's a “reasonable assumption” that in reducing headcount they are doing what Allianz would like. “It's just common sense,” he said.

Mr. Holmes said Allianz is concerned about improving PIMCO's deteriorating cost-income ratio.

Mr. Holmes said Allianz SE reported that PIMCO's cost-income ratio, the cost of running PIMCO compared to the income generated, worsened to 64.5% in the calendar year 2015, from 61.3% for 2014, because of lower fee revenue from declining assets under management.

As PIMCO moves forward, one thing is clear: Traditional active equity management is not likely to be a significant part of its future.

PIMCO launched active equity investment strategies in 2010 aimed at showing it could compete beyond fixed-income strategies. Now, the firm's next expansion likely will be into alternatives.

In the June 16 memo, PIMCO senior officials said, “We also see growth potential in a range of areas including alternatives, private credit, solutions, client analytics, and regionally in many parts of the world, not to mention the increasing investor demand for many of our non-traditional strategies.”

One hopeful sign for PIMCO is that consultants to institutional investors are again recommending the firm for some of its fixed-income strategies.

Allan Emkin, founder and managing director at institutional investor consulting firm Pension Consulting Alliance, Portland, Ore., said in an interview that his firm and others are no longer shunning PIMCO.

“They are no longer in the penalty box, and they don't deserve to be in the penalty box,” he said. “They have great products and great people.”

PIMCO might have better luck with expanding its alternative capacities than it did with active equities.

Aaron Dalrymple, a managing director at Cliffwater LLC in Marina del Rey, Calif., said PIMCO's alternative strategies have performed well and have been on a steady growth track.

Mr. Dalrymple said PIMCO's credit-oriented hedge fund platform, which was started in 2004, grew to nearly $5 billion by 2008 and today has $16 billion invested in five funds. Another $8 billion is in private equity-like funds, he said.

PIMCO has been more aggressive in growing the hedge fund platform's research capabilities in the past two years, Mr. Dalrymple said. “Instead of just relying on traditional credit research analysts, PIMCO has looked for analysts and portfolio managers that can also contribute on the short side,” he said.