PIMCO in Theory and Practice: The Significant Difference

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:

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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


David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.
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