PIMCO in Theory and Practice: The Significant Difference

PIMCO in Theory and Practice: The Significant Difference

Things are weird when you write the second part of an article five years later.  I don’t have a strong opinion on some of the arguments between Felix Salmon and “Dutch_Book,” or maybe I have too many opinions, and they conflict.

But I wanted to offer some data on PIMCO that I have gathered, as I considered the arguments made by Felix.  Here it is:

A few points, Felix:

1) This is an old piece of mine, but it helps explain the investment strategies on PIMCO.  PIMCO is basically a bond quant shop that does carry trades, and sells overly expensive volatility.  If you want the non-technical paper written by Bill Gross on the topic, shoot me a DM or an e-mail, and I will pass it on.

2) PIMCO is now wholly owned by Allianz SE (FRA:ALV) (ETR:ALV) (PINK:AZSEY).  After the sale in 1999, Pacific Life held a 30% stake in PIMCO, but also had option to put their stake in the company to Allianz, which they exercised back in 2008.

3) When the acquisition of PIMCO happened, Allianz SE (FRA:ALV) (ETR:ALV) (PINK:AZSEY) issued B-units to the management of PIMCO, subject to vesting, to give them an incentive to perform well.  The B-Units were entitled to 15% of PIMCO’s adjusted profits.  Allianz has the right to buy in the B-units, with the price driven by a formula.  As of the end of 2011, only 11% of the B-units remain outstanding.  That figure comes from Allianz’ 2011 annual report (in English).  Allianz paid out €449 million to PIMCO management in this program in 2011.

I’m just guessing, but I think all of the B-units will be bought in by 2013.

4) But that’s not all, in 2008 Allianz created M-units.  Those are options granted to PIMCO management off of a formula-driven price for PIMCO shadow stock.  Unlike the B-units, I can’t tell how much of PIMCO is being given to management.  It looks smaller than the B-Unit program.

In 2011, Allianz paid roughly €40 million to PIMCO management from the M-unit program.  If my calculations are correct, the shadow stock price of PIMCO rose 33% in 2011.

All of the 2011 data can be found here.  Particularly look at pages 306-307. In terms of special compensation, it looks like Allianz paid around €490 million ($640 million) to PIMCO management in 2011, and that does not include their salaries.

So I don’t know how much any single person got at PIMCO in 2011, but large payouts are not impossible.  It is worth noting that the payouts derived from many years of work, and PIMCO is a huge organization.

That’s all I have to say.  The data does not admit any more obvious conclusions for me.

By David Markel, CFA of alephblog