Pimco could sustain total additional outflows of up to $350 billion (€279 billion) over the next two to three years, but this should not hinder the firm’s ability to manage client assets effectively, Morningstar says.
The possible outflows of $300 billion to $350 billion account for 15%-20% of Pimco’s total assets under management, which stood at nearly $1.9 trillion at September 2014.
Pimco has experienced 18 consecutive months of outflows and was rocked by the departure of Bill Gross, its co-chief investment officer, recently. But despite the exit of clients it remains a behemoth in asset management, says Morningstar, and outflows should not affect its business model.
Pimco’s two main costs are its people and its back-office operations. A high level of compensation exists and asset outflows could affect the bonus pool, forcing staff cuts. Yet at the same time, the bill for State Street, which is Pimco’s back-office operations provider, would also fall as assets flowed out.
According to estimates from Allianz, Pimco’s parent company, and Morningstar’s equity analysts, Pimco generated about €8 billion in revenue in 2013, before commissions of around $6.5 billion.
Morningstar, in a detailed report Pimco recap: Flows, ratings, and firm-level views, says: “By most accounts, Pimco compensates its portfolio-management personnel extremely well, landing well above industry averages if not near the top of the range.”
This sets high internal expectations for compensation, which could be challenging to meet if Pimco revenues fell precipitously, the report says. Yet it also lessens the risk of rival firms poaching key personnel.
To further reduce that risk, Morningstar notes, Pimco recently implemented an additional $279 million retention package, comprising significant, additional cash payouts over the next three years for people who stay with the firm.
Morningstar also notes that some former employees have returned to Pimco since Gross’s departure to Janus Capital Group.
“… the firm has already started to see some former employees return, suggesting that a post-Gross Pimco could very well be a more pleasant place to work.”
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