Bloomberg News

Pimco Said to Fold Fund Unit Promoting Endowment-Style Investing

September 13, 2011

Sept. 13 (Bloomberg) -- Pacific Investment Management Co. has abandoned an effort to oversee money for endowments and foundations that would have used some outside managers, according to four people familiar with the decision.

Pimco’s fund-of-funds group targeted institutions seeking to mimic the long-term investment strategies of wealthy universities such as Harvard and Yale while maintaining the flexibility to quickly raise cash. The unit, established in 2010 under Chief Executive Officer Mohamed El-Erian after his stint as Harvard’s endowment chief, struggled to win investors, said the people, who asked not to be named because they didn’t want to jeopardize their relationships with the firm.

The group, headed by former Harvard fund manager Mark Taborsky, sought to take on investment-outsourcing firms such as Makena Capital Management LLC, run by a former Stanford University endowment chief, and Investure LLC, whose founder previously oversaw the University of Virginia’s fund. BlackRock Inc., the world’s biggest asset manager, said last week that it hired Taborsky to lead a unit similar to the one at Newport Beach, California-based Pimco.

“It’s an amazingly competitive landscape,” said Kevin Quirk, a founding partner at Casey Quirk & Associates LLC, a management-consulting firm in Darien, Connecticut. “I wouldn’t be surprised to see the market consolidate a little bit more and see certain players decide not to be in the business strategically.”

Mark Porterfield, a spokesman for Pimco, didn’t return phone calls or e-mails seeking comment on the fund-of-funds group. Taborsky, 45, didn’t respond to phone calls seeking comment on his departure.

Few Missteps

The disbanding of the fund-of-funds group is a rare setback for Pimco, home to Bill Gross’s $245 billion Total Return Fund, the world’s largest mutual fund. The firm’s assets under management expanded more than sixfold in the past decade to $1.3 trillion. Its mutual funds gathered $43.3 billion in net deposits in the year ended July 31, more than any competitor, according to data from research firm Morningstar Inc. of Chicago.

In March 2010, the company hired Gregory Hazlett as head of equity strategies and Andrew Hoffmann to oversee real-asset investments at the fund-of-funds group. The unit planned to use some outside funds as well as those run by Pimco. Hazlett has an agreement to leave the company, while Hoffmann is employed through next March, one of the people said. Hazlett didn’t respond to e-mails seeking comment on his status, while Hoffmann declined to comment.

El-Erian has led a push to diversify into equities, exchange-traded funds and absolute-return funds that seek to preserve capital in rising and falling markets. Pimco’s equity strategies have gathered about $4 billion in assets. The firm is owned by Munich-based insurer Allianz SE.

Lesson From 2008

Investment-outsourcing firms manage money on behalf of endowments and foundations, picking investments and overseeing risk based on guidelines set by the client. The business gained momentum as the richest colleges beat market indexes in the decade ended June 2008 by loading up on hard-to-sell assets such as private equity and real estate, while cutting stocks and bonds, a style pioneered by Yale University endowment chief David Swensen.

Pimco sought to refine the model to provide more liquidity after the collapse of credit and equity markets in 2008 left universities short of cash and unable to sell assets, Taborsky said in a 2009 interview.

“Liquidity is a premium and sometimes it’s worth investing in that and sometimes it’s not,” he said. “One of the lessons from 2008 that is part of asset allocation is being able to stay in the game and take advantage of the opportunities.”

Harvard Ties

Top endowments used outsourcing firms in the 1960s and 1970s, and the results were “generally disasters,” according to Josh Lerner, a professor at Harvard Business School in Boston who wrote a case study on Yale’s endowment. The New Haven, Connecticut, school, which helped to found Endowment Management and Research Corp. in Boston, fired the manager in 1979 after the institution’s fund had dropped 46 percent since 1969 on an inflation-adjusted basis, according to Lerner’s research.

Prior to Pimco, Taborsky was hired by El-Erian when he ran Harvard’s endowment from February 2006 to December 2007. As investment chief at the Cambridge, Massachusetts, university, El-Erian returned 23 percent in the fiscal year ended June 30, 2007, beating the 18 percent increase of market benchmarks. The fund shrank a record 30 percent to $26 billion in the year ended June 30, 2009, after investments plunged 27 percent.

El-Erian returned to lead Pimco, where he had spent seven years as an emerging-markets fund manager, in 2008.

--With assistance from Sree Vidya Bhaktavatsalam in Boston. Editors: Larry Edelman, Steven Crabill

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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