The subdued world of bond, stock and mutual funds got a jolt this month when Newport Beach’s Pacific Investment Management Co. said it wants to expand into a new type of exchange-traded fund.
Pimco is awaiting Securities and Exchange Commission approval for the move and hopes to have its ETFs ready for investors sometime next year.
The move is an expansion for Pimco, a unit of German insurer Allianz SE best known for funds that invest in government and corporate bonds.
Some in the fund business see Pimco’s effort having a big impact not only on ETFs but also on mutual funds and other investments.
“This is a real shot across the bow,” wrote William Koehler, chief investment officer at ETF Portfolio Solutions Inc. near Kansas City, on financial Web site IndexUniverse.com. “This could be a game-changing action.”
Pimco is looking to get into a new type of ETF, which are like mutual funds but trade on an exchange like a stock. ETFs typically invest in stocks and bonds with many seeking to mimic the performance of an index.
In March, the SEC approved actively managed ETFs, where fund operators can change their holdings often to seek the best returns for investors. ETFs based on indexes don’t change holdings that often.
Since the SEC OK’d actively managed funds, only a few have been proposed or offered by startups or operators of index funds, including Vanguard Group Inc.
In July, Pimco filed for permission for a passive ETF set to invest in bonds, the company’s bailiwick.
If all goes well, the company could end up with a number of active ETFs that would invest in stocks, options, futures contracts, currency and commodity funds, according to Tammie Arnold, a managing director with the company.
The goal is to attract money from institutional investors,pension funds, college endowments and others,and individual investors now putting money with other ETF and mutual fund managers.
Pimco’s investing track record and size, with $830 billion under management, is prompting industry watchers to predict this move will have an impact.
Arnold is more cautious: “We really don’t know what to expect from them yet.”
The decision to go with ETFs was the next logical step for the company to expand from the mutual funds and managed accounts it already offers, she said.
ETFs have grown in the past two years, going from fewer than 200 to about 800 as investors see them as an alternative to mutual funds.
Index ETFs have a reputation for lower management fees than mutual funds. Pimco’s uncertain of pricing for its active ETFs, Arnold said.
Most ETFs have come from companies such as Invesco Powershares Capital Management LLC in Weaton, Ill., and WisdomTree Investments Inc. in New York, which have focused on index tracking.
Speculation has been that big fund managers such as Pimco would step in for a shot at the new market ever since the SEC approved active ETFs.
So far, only Bear Stearns Cos., which is being acquired by JPMorgan Chase & Co. after facing bankruptcy earlier this year, and Invesco have offered active funds.
Neither has had a great turnout with them.
JP Morgan recently said Bear Stearn’s bond strategy ETF would shut down in October after it failed to attract enough money.
Some have said the fund didn’t work because of a lack of marketing and its debut in a volatile market that led to the collapse of Bear Stearns.
Meanwhile, Invesco PowerShares’ four active ETFs have pooled less than $20 million from investors.
Pimco hasn’t made any marketing plans yet, according to Arnold. It hopes to rely on its reputation as “smart money,” she said.
The company’s co-chief investment officers, Bill Gross and Mohamed El-Erian, have track records envious in the industry. They grab regular media attention for their comments on the markets.
Gross manages Pimco’s Total Return Fund, the largest bond fund with $130 billion under management.
His strategy involves making money off swings in the prices of bonds as well earning interest from them.
The company hasn’t been outlined what strategies and managers would be involved with Pimco’s ETFs, according to Arnold.
While known for bonds, Pimco has invested in stocks, currency and commodity markets, said Don Suskind, a vice president with the company.
“We’ve built a lot of expertise in various sectors,” he said.
A potential downside with ETFs could come from other fund managers having a clear view of changes in Pimco’s holdings and try to copy their moves.
With regulators requiring that funds changes be made timelier than mutual funds, “It’s something we thought about,” Arnold said.
Changing Guard
Bill Thompson, who oversaw the colossal growth of Pacific Investment Management Co. during his 15 years as chief executive, never thought the bond fund manager would become as big as it has.
He said he remembers betting founder and Co-Chief Investment Officer Bill Gross that Pimco never would reach $100 billion in assets under management.
He bet Gross again on the golf course that it would never hit $200 billion.
Now Pimco has $830 billion under management.
“We became much more than a local secret,” Thompson said. “We never set this as a goal.”
The humble and direct Thompson is quick to give credit to Gross, who handles the company’s investment decisions.
Thompson is set to retire at year’s end, after starting when Pimco was a $40 billion bond fund manager with one office in Newport Beach.
Pimco now has nine offices around the world, the result of Thompson’s global expansion.
Mohamed El-Erian, who has shared the top job with Thompson since January, is set to become sole chief executive when Thompson leaves.
El-Erian also shares the chief investment officer title with Gross.
“He’s a solid leader,” Thompson said of El-Erian. “He’s able to combine the investment elements with the business side.”
Thompson’s role has been to build Pimco, overseeing its marketing, communications, technology and legal dealings.
“It takes more than just two or three people to make it a success,” he said. “And when a hot hand turns cold, the focus is on how we run things.”
Thompson was a strong proponent of launching the company in Asia, an area he was familiar with after two years in Tokyo as Chairman of Salomon Brothers Asia Ltd.
“You don’t do it by landing in with a parachute,” he said. “We had to bolt it together.”
Next year Pimco will open an office in Dubai.
Hiring former Federal Reserve Chairman Alan Greenspan as a consultant was Thompson’s doing.
Thompson plans to stay on as a consultant to Pimco.
He said he’ll spend most of his time with his family, as well as other activities including philanthropy.
The St. Louis native is a diehard Cardinals baseball fan, and has made it his mission to visit every major league baseball park in the country.
He’ll also stay active with the University of Missouri’s autism center, which was named for him after an $8.5 million gift.
Work with local charity groups, including the Pimco Foundation, Hoag Memorial Hospital Presbyterian and the Pacific Symphony, will continue.
An avid golfer, Thompson once hit a hole-in-one at the 2003 Morgan Stanley Invitational Pro-Am at Ohio’s Muirfield Village Golf Course. He also likes fishing and skiing.
,Dan Beighley
Pimco Loss on Lehman
Newport Beach-based bond manager Pacific Investment Management Co. is set to take a loss with the collapse of investment banker Lehman Brothers Holdings Inc. (see related story, page 1).
Pimco, as well as other investment companies such as Valley Forge, Pa.-based Vanguard Group Inc., could lose an estimated $86 billion from bond holdings, according to a recent Bloomberg story.
It isn’t immediately clear how much Pimco holds in Lehman bonds.
Lehman filed for bankruptcy protection early last week.
Lehman’s bonds are held in at least 12 of Pimco’s funds, including Co-Chief Investment Officer Bill Gross’ Total Return Fund, the largest bond fund with $130 billion in assets.
Investors will recover different amounts in the investment bank, depending on their ranking as creditors.
Lehman listed $613 billion in debt versus $639 billion in assets in its bankruptcy filing.
Pimco recently benefited from a federal takeover of government-sponsored lenders Fannie Mae and Freddie Mac, which netted the company $1.7 billion.
At a recent check, Gross’ Total Return Fund was up 3.5% on the year, ranking in the 96th percentile of his peers.
,Dan Beighley
