New leader at PIMCO was in right place at right time

Emmanuel Roman's appointment as the new CEO at PIMCO wasn't planned, or that's what officials of the money management firm are saying.

The money management firm was looking for a high-level executive to help with strategic leadership, and it only became clear during the interview process that Mr. Roman — CEO of Man Group — should replace Douglas Hodge as head of Pacific Investment Management Co., said a source at PIMCO who asked not to be identified.

But the announcement could signal a change at the Newport Beach, Calif., money management firm, whose executives previously had held to the belief that all firm growth should be organic.

Regardless of management's intentions, Mr. Hodge is the third executive to leave a top spot at the firm in the past 30 months, raising concerns among consultants that the firm is still in turmoil.

Mr. Hodge was named CEO following the departure of Mohamed El-Erian, then president and co-chief investment officer, in January 2014. Mr. El-Erian had been feuding with William H. Gross, the firm's co-founder with whom he shared the chief investment officer title. Eight months later, Mr. Gross left — just before he was to be ousted by other top officials, including Mr. Hodge, because of a continuing dispute over how the firm should be managed.

The PIMCO source said company officials conducted an annual strategic review and were looking for a top executive to help with the company's strategic vision. As the review was conducted and interviews were held, the source said, it became apparent Mr. Roman could help PIMCO most as CEO.

During his three years as Man Group CEO, Mr. Roman developed a record of buying other money managers, helping expand Man's business beyond its AHL Diversified hedge fund. Man Group is the largest publicly listed hedge fund company in the world with $78.6 billion under management.

The PIMCO source said Mr. Hodge, who until his promotion to CEO was PIMCO's chief operating officer, has expertise in managing client relationships but not in overall strategic planning.

Mara Dobrescu, senior manager research analyst at Morningstar France, based in Paris, said in a telephone interview that Mr. Hodge “presided over a difficult stretch for the firm — there is no indication that business management itself was the problem, although there were a number of changes, and a period of significant outflows.”

Mr. Roman's appointment is effective Nov. 1. Mr. Hodge will become a managing director and senior adviser on that date, but his role hasn't been specified.

Some consultants to institutional investors say the latest management change is worrisome, raising concerns about a lack of continuity among PIMCO's leadership. A number of consultants had refused to recommend the firm after Mr. Gross' departure, but that hard stance had been softening recently.

While it remains one of the largest money management firms in the world, PIMCO's assets under management have dropped by 25%, to $1.5 trillion as of June 30 from $2 trillion three years ago. The fixed-income-oriented investment company has been lowering its workforce as it deals with a reduction in fee income from clients; it eliminated active equity strategies that never caught on with investors.

“We worry their eye is not fully focused on the investment ball,” said Greg Woods, a vice president at BPAS Fiduciary Services in Philadelphia. Mr. Woods said performance problems are still affecting key PIMCO strategies — including its flagship Total Return Fund, which Mr. Gross had managed until his departure — and the combination of performance issues and continued management changes is troublesome.

Mr. Woods said he would want to see how the situation “plays out” before recommending new allocations to PIMCO.

PIMCO officials previously had told Pensions & Investments the firm's management didn't believe in acquisitions because they felt merging two different money management firms would be too difficult and disruptive to the PIMCO culture, known for its hard-driving atmosphere and long workdays.

But Mr. Roman, who became Man Group CEO in 2013, expanded that firm's assets through the acquisition of smaller competitors including NewSmith Asset Management LLP, Numeric Investors LLC and Pine Grove Asset Management.

PIMCO officials have said the firm wants to expand its alternatives business.

The PIMCO source said while Mr. Roman's hiring doesn't necessarily mean PIMCO's culture of expanding through organic growth will change, it does signify PIMCO could now be open to an acquisition of an asset manager.

While Mr. Roman's merger and acquisition experience could be helpful if PIMCO were to look at acquiring another money management firm, the source said, that wasn't the reason for his hiring.

Morningstar France's Ms. Dobrescu said the replacement of Mr. Hodge “in itself was a surprise,” but noted the hire of Mr. Roman “is consistent with the business strategy PIMCO has focused on lately: it is committed to keeping a large (part of the business) in more conventional fixed-income offerings, but alternatives have also become a larger and larger part in recent years. In that respect, (Mr.) Roman's recruitment squares well with the strategy.”

While she said PIMCO “has been all but allergic to growth by acquisition,” Ms. Dobrescu added that because of the broader industry trend toward passive investment and specialized alternatives, and with traditional asset classes delivering lower returns, “it is not surprising to see PIMCO intensify its focus on the alternatives space.”

PIMCO had less than 10% of its assets in alternatives as of Dec. 31, according to P&I data.

She said firm executives have said Mr. Roman is a cultural fit, and his appointment does not signal a major change in business strategy nor a sole focus on alternatives. Rather, executives “want to improve investment performance, expand into non-traditional areas, but keep a large book in traditional fixed income,” said Ms. Dobrescu.

There are two areas that Morningstar analysts will keep an eye on: how Mr. Roman's experience of “growing a company through acquisition is reconciled with the culture at PIMCO,” and also the fact that Mr. Roman assumed the CEO position “despite the presence of Jay Jacobs,” PIMCO's president, Ms. Dobrescu said. She said Mr. Jacobs' ascent at the firm had suggested he would eventually become a CEO candidate, but noted he is said to have been part of the hiring committee.

Mr. Jacobs, who became president when Mr. Hodge was named CEO, has also seen his reporting line change. The structure now has Mr. Jacobs reporting directly to the CEO, rather than the executive committee. PIMCO executives “said they felt it was easier to attract top candidates by having a more traditional reporting structure with the president reporting to the CEO,” said Ms. Dobrescu. “It is clearly worth monitoring whether (Mr.) Jacobs remains sufficiently content to stay at the firm.” n