Allianz SE (ALV), owner of the world’s second-biggest asset management business after BlackRock Inc., is trimming targets for that unit as Europe’s debt crisis crimps investment returns.
The company is targeting annual asset growth of 5 percent to 10 percent “over a full market cycle,” Jay Ralph, Allianz management board member responsible for asset management, said in an interview in Munich. The previous target of 10 percent, derived equally from market gains and client inflows, is no longer achievable, he said.
“Today’s market environment won’t allow the same level of market performance as in the past,” said Ralph, who headed the insurer’s business in North America before taking over from Joachim Faber this year.
Asset management’s contribution to the operating profit of Europe’s biggest insurer almost tripled to 27 percent over the past five years. Growth was driven by Pacific Investment Management Co., the Mohamed El-Erian and Bill Gross-led business that Allianz acquired more than a decade ago. Pimco, which gained assets in the second quarter while those at BlackRock declined, is seeking to attract more European clients after Allianz granted the division more independence last year.
“Pimco is an impressive success story for Allianz, especially as many other asset managers seem to face difficulties,” said Philipp Haessler, an analyst at Equinet AG in Frankfurt. “Asset management has been a good hedge for Allianz when its insurance operations are burdened by low investment returns.”
Total assets at Allianz Asset Management climbed 16 percent to 1.75 trillion euros ($2.16 trillion) in the second quarter from a year earlier. Pimco, which accounted for almost 82 percent of those assets and an even bigger share of operating profit, was separated from the insurer’s other managers last September to give the Newport Beach, California-based unit more independence as it expands into equities.
“We have not lost a single client as a result of the new setup of our asset management unit, which is better than we anticipated,” said Ralph.
Asset gains at Pimco contrast with a 3 percent drop in BlackRock’s assets to $3.56 trillion in the second quarter after market losses totaling $76.2 billion and client redemptions of $29.4 billion.
Gross’s Total Return Fund (PTTRX:US), the world’s biggest bond fund, attracted $2.1 billion last month. The seventh straight month of net deposits into the mutual fund contributed to $8 billion in new cash for the year through July 31, Chicago-based Morningstar Inc. said Aug. 1.
Clients have pulled more than $130 billion over the past two-and-a-half years from AllianceBernstein Holding LP, the New York-based fund-management unit of Axa SA, Europe’s second-biggest insurer. That included outflows of 5.2 billion euros in the first half, Paris-based Axa said on Aug. 3.
Pimco, manager of the world’s largest bond mutual fund, was the highest ranked of 23 rivals in an institutional investor brand-loyalty survey in February by Cambridge, Massachusetts-based Cogent Research. AllianceBernstein came last.
“While fixed-income-heavy Pimco clearly benefits from the declining interest rates that we’ve seen over the last years, it remains to be seen how they will do once this trend reverses,” said Equinet’s Haessler, who has an accumulate rating on Munich-based Allianz.
Inflation, which may accelerate as European leaders seek to resolve the region’s debt crisis, is not a concern for Pimco’s business, Ralph said.
“Pimco has been particularly good in taking their clients from core fixed-income products to various non-core products such as inflation-protected or real-return oriented strategies that protect clients from inflation,” he said.
Money managers such as Pimco and BlackRock, which earn fees based on the assets that they manage for clients, traditionally benefit from rising stock markets and investor deposits into higher-fee active stock and bond funds. Treasuries made investors 9 percent over the past two years, according to indexes compiled by Bank of America Merrill Lynch.
Allianz Global Investors, the remainder of the insurer’s asset management business led by Elizabeth Corley, has announced plans to cut costs as it integrates international business units and creates three European hubs in London, Paris and Frankfurt. AGI, with 291 billion euros in assets under management, had a cost-income ratio, a measure of efficiency, of 69.3 percent at the end of June compared with Pimco’s 52.9 percent.
“AGI has already done a lot of good work on the cost side,” Ralph said. “While quarters may move around a bit, it’s absolutely clear that the cost-income ratio will be trending down.”
Pimco already has an “outstanding” cost-income ratio and therefore will focus on further growth, Ralph said.
“Pimco’s strong, yet improving, cost-income ratio will help it preserve its competitive advantage too and suggests it is successfully leveraging its scale,” said Andrew Broadfield, an analyst with Barclays Plc in London. “For Allianz, owning such a successful asset manager is a good business hedge, should life insurers lose share of the savings market to asset managers, as they have in many of the mature markets.”
Ralph said Gross and El-Erian remain committed to their parent.
“Pimco feels very comfortable within the Allianz group, as do Bill and Mohamed, therefore I don’t foresee any changes to our two asset manager strategy or their commitment to the current setup,” he said.
While Allianz’s asset management business thrives, other financial firms, including Deutsche Bank AG, have been trying to sell their fund managers to free up capital amid Europe’s sovereign-debt crisis. Germany’s biggest bank shelved a plan in May to sell its asset management operations to Guggenheim Partners.
Italy’s UniCredit SpA (UCG) also scrapped the sale of its Pioneer Global Asset Management unit last year, while Robeco Groep NV is “working closely” with its owner, Rabobank Groep, on a strategic review of its business, the money manager said Aug. 14.
Societe Generale SA earlier this month sold Los Angeles-based TCW Group Inc., the $131 billion asset manager founded by Robert Day in 1971, to Carlyle Group LP in a deal that ended 11 years under the French bank’s ownership.
Allianz isn’t interested in asset management acquisitions, Ralph said.
“Why would you buy other asset managers?” he said “We already have a global distribution and would rather try to attract talented people with investment expertise than pay for additional legal entities.”
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