Pimco’s best laid plans for european push

Pimco’s assault on the European distribution market has been accurately planned and methodically implemented. Michael Thompson, co-head of European institutional remarketing at Pimco, together with Kevin Kuhner, explains that in 2002 – when open architecture was still in its infancy – a number of financial institutions meeting a defined set of criteria were identified as potential targets in each European country. The selected distributors were then closely monitored and any progress with them meticulously recorded. “We set out six criteria originally to determine which financial institutions would be our preferred partners,” says Mr Thompson. “Our partners can be multi-national, regional or large local financial institutions.” The main requirement was that fund houses had to follow a “best of breed philosophy”, as opposed to best revenue split. “Because there is always the tension between these two options, do I want the best products for the end users, or am I going to include everyone who makes me the most money – and then [in the long term] the least money?” adds Mr Thompson. How to recognise these distributors is quite simple, according to Mr Thompson. “If their philosophy is: ‘We love your products, but your fees are too high’, they are not going to be a primary target for us,” he points out. If this statement may give away some banks’ reactions to Pimco’s fee levels, Mr Thompson is keen to explain that the fee structure which Pimco has is very transparent. Distributors having a multi-country footprint were also circled as top tier targets, coupled with those having a very high penetration rate in their own country. “Another key criterion was that the distributors had to have a structure which allowed us to plug into preferably some sort of omnibus account,” he says. Pimco was going to sell as a component in someone else’s product, much like a microchip in a brand-name computer, says Mr Thompson, and not directly to the end users. The other criteria concerned the opportunity to raise assets and distribute multiple products through third parties. This distribution strategy, called ‘institutional remarketing’ to express the idea that institutional clients are ‘remarketing’ or ‘selling on’ the product they buy, explains Mr Thompson, had already proved to be successful in the US, where the speciality fixed income manager – started in 1971 as an institutional house – gradually adopted a wider distribution approach. Currently, around half of its assets in the US are in this remarketing business, sub-advisory or funds, accounting for a total of $200bn (?158bn) out of the $400bn total US assets. “This model is highly scalable and highly efficient,” says Mr Thompson, adding that Pimco has ?500bn in assets under management globally, but runs them with only 278 investment professionals. During the past three years, Pimco’s remarketing team have been focusing on the implementation strategy of the European plan, clearly benefiting from the move towards guided architecture recently made by major distributors. “In some cases we are the largest or one of the largest partners in their guided architecture. In other cases we are a significant provider but not the top and this is our goal, to achieve the next level,” he states ambitiously. Excluding Germany, where Pimco employs the distribution network of its parent company, Allianz Global Investors, to reach end users directly, Switzerland, the UK and Southern Europe, including France, Italy and Spain are the countries where Pimco’s remarketing strategy has been most successful. Like many asset management companies keen to make a strong push into Europe by increasing their share of third-party assets, Pimco has adopted a ‘key account’ model, which seems particularly efficient. “We have 130 accounts, using over 160 strategies, but 80 per cent of the assets come from the top 15-20 accounts,” says Mr Thompson. Currently totalling over $13bn, Pimco’s third-party European business has recently seen a shift towards sub-advisory, which already accounted for 80 per cent of the assets at the start of the business four years ago. This change, due to new opportunities offered by the Ucits III directive, follows a three-year period when funds sold through intermediaries proved the most popular distribution channel, explains Mr Thompson. “Recently, we have seen quite a few sub-advisory accounts come in. That has to do with Ucits III, which, among other things, permits the efficient use of derivatives in portfolios. We were one of the few managers that understood what Ucits III meant,” claims Mr Thompson. “So we received a whole series of requests to manage our bond portfolios white-labelled.” The sub-advisory accounts tend to be large, as minimums are generally $100m or more, depending on the strategy. Minimums on funds are lower, $5m, which is a clear indication of Pimco’s institutional past. “We are really an institutional manufacturer and it is very difficult for an end-user to come directly to us,” says Mr Thompson. Asked whether such a strong institutional footprint and little experience of retail sales channels has represented, in some way, an obstacle in winning third-party business in Europe, Mr Thompson states: “This is the reason why we have chosen this strategy. There is very little value added in having others sell Pimco’s funds direct. But if we partner with a group selling their funds of funds, who can explain exactly the asset allocation they have inside and why they have chosen Pimco for the fixed income component, that is a much more powerful sell.” Mr Thompson says that although other banks could distribute their funds as third-party funds, almost all their sales come from being on distributors’ platforms, or in funds of funds and multi-management. Marketing literature and customer support are provided in the form of monthly sheets, outlooks on strategies and services for the accounts. “We provide distributors with detailed attribution and explanations of the underlying strategies in the portfolios,” says Mr Thompson. “There is a Pimco portfolio manager on television every single day, we give our views on the markets, interest rates and so on and this is what people are interested in.” And he adds, “We never see the end-users, but we do invite clients to our road-shows.” Mr Thompson has ambitious plans for his institutional remarketing business, which in four years has grown to a quarter of the assets of the London office, which is the hub of the European market. Pimco’s third-party assets are currently equally split between sub-advisory and funds, although two third of the revenue are generated by funds only. “Last September we were at $10bn and the idea was to double the business in three years, by 2008. But, at $13.5bn, we are well ahead of that. We are still revising that number.”