8/30/2013 2:45 PM ET|
Pimco to push 'alternative' funds
A recent SEC move permits the marketing of funds employing a variety of strategies outside of traditional mutual funds and ETFs.
Pacific Investment Management, the world's largest bond-fund manager by assets, wants to hang more with the hedge-fund crowd.
The firm, based in Newport Beach, Calif., is planning an expansion of its alternative-investments business in the coming months aimed at both individual and institutional clients, including potentially launching new funds invested in assets such as distressed debt in Europe.
Douglas Hodge, Pimco's chief operating officer, called alternative investments "a very important area for us" in an interview. He said the firm is responding to increased demand from investors of all types, as well as to changing regulations.
But the push into riskier, more-complex products marks a shift for the firm, whose bond funds have long been seen as some of the safest and most reliable on the market.
The SEC moved last month to lift a restriction prohibiting hedge funds, private-equity firms and other businesses from publicizing shares in private offerings as part of the Jumpstart Our Business Startups Act, effective Sept. 23. That allows Pimco and others to pitch alternative products more directly to institutional investors as well as wealthy individuals.
"The world is going to change here because of the JOBS Act," Hodge said.
While Pimco, a unit of German insurer Allianz (ALIZF), already has an alternatives business, it has been overshadowed by its large presence in bonds, including founder Bill Gross's Pimco Total Return (PTTRX) fund. The expansion in alternatives, if successful, will provide Pimco solid footing in territory investors are flocking to in droves.
One of Pimco's largest and most well-known so-called liquid alternative funds is the Pimco Unconstrained Bond (PFIUX) fund, with about $29 billion of assets under management. The fund is "unconstrained" in that it has the ability to invest in a range of fixed-income investments. Last year, it returned 8.6% compared with 4.2% for its benchmark, the Barclays U.S. Aggregate Bond Index, according to Morningstar. The fund was down 2.0% this year through Aug. 27, compared with a decline of 2.7% for the benchmark.
Hodge says he is interested in investing in the distressed mortgages and commercial real-estate loans European banks are currently lopping off their balance sheets, either to add to an existing fund or to create new ones.
Pimco recently filed a preliminary prospectus for a new liquid alternative fund called the Pimco Trends Managed Futures Strategy fund. The fund, available to all investors, will invest in derivative instruments linked to interest rates, currencies, mortgages, credit and commodities. Hodge declined to comment on the fund, citing a regulatory period of silence following the filing.
In a sign Pimco is targeting retail investors with these more complex products, one class of this new fund has a $1,000 minimum for investment and $50 minimum for subsequent investments, similar to many of the company's other liquid alternative funds.
Pimco, with about $2 trillion in assets under management, has been in the alternatives business for about a decade. The company has about $110 billion in assets under management in liquid alternative funds, as well as about $27 billion in private-equity and hedge-fund strategies.
Liquid alternative funds, or simply alternative funds, employ strategies outside of a traditional mutual fund or exchange-traded fund. Those strategies can include shorting, or betting against, stocks or bonds; investing in other asset classes, such as commodities; and using derivatives to hedge bets, according to experts. In some respects, they are similar to hedge funds and private-equity funds but are less exclusive and allow investors to buy and sell shares more quickly.
Pimco isn't alone in expanding its alternatives business. Fidelity Investments, the country's second-largest mutual-fund company, has recently backed two liquid alternative funds. The company invested $1 billion of client funds in Blackstone Group's (BX) first mutual fund, which gives money to hedge-fund firms to invest. Fidelity also put investor money into a fund launched by Arden Asset Management in 2012. A Fidelity spokeswoman has said the funds will provide investors diversification and portfolio resilience.
Pimco has faced challenges as it has tried to complement its bond business, specifically in equities. The company brought in Neel Kashkari, who oversaw the U.S. Treasury's Troubled Asset Relief Program during the financial crisis, in 2009 to expand its equity business. But Kashkari left the firm in January to enter politics, and the six new stock funds he launched during his tenure had accrued just $10 billion in assets under management at that time, according to Pimco. Kashkari declined to comment.
Hodge said Pimco already has an alternatives business, so the new push isn't an attempt to diversify. The firm is still looking for a replacement for Kashkari.
Investors pour cash into alternative funds
Fund firms are expanding their alternative offerings in a bid to not only increase their asset bases but also to satisfy strong investor demand, says Andrew Clark, manager of alternative-investment research at fund-research firm Lipper. Investors poured a net $57.7 billion into alternative mutual funds this year through July 31, compared with $23.9 billion for all of 2012, according to Lipper.
Fund companies "are not seeing their traditional base grow as much as they want to," says Clark.
But regulators are beginning to take a closer look at alternative funds available to retail, or individual, investors. The general concern is that brokers are selling them to people who may not understand the risks and complexities of the strategies involved.
Clark said at least some of those fears seem legitimate. "I don't think individual investors really understand them at all," he said.
Hodge of Pimco says the firm is conscious of providing investors with the proper disclosures in its funds' prospectuses and in marketing materials.
"We really want the people who invest in any of our products -- and they range from very conservative to products that carry more risk -- to understand what they're getting into," he said.
A Pimco spokesman added that the firm doesn't sell directly to individual investors, marketing instead through financial advisers, who are generally more knowledgeable about products.
More from The Wall Street Journal:
VIDEO ON MSN MONEY
Just because they offer alternative funds doesn’t mean people should invest in them. Most small investors with IRAs and 401Ks don’t need these and should stay away.
I'll stick with bread and butter dividend payers, across diversified sectors, bonds,
and some commodities exposure.
I know - boring!
Then, with the Vegas money maybe take a look at what Pimcos pimping.
Guess I'm with Mr. Fat on this one. HAR HAR!
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