Pimco: Even Bigger Than You Thought

Are you in the mood for 4,500 words on how Pimco is alleged to have illegally squeezed the Treasury market in 2005? Then run along to Bloomberg forthwith. The details of the lawsuit bore me, with the exception of the factoid that the whole thing sprang out of a Gretchen Morgenson column back in 2005. I’m more interested in Pimco’s sheer mindblowing size: it has $747 billion in assets. The article quotes pension consultant Michael Rosen:

Small or large, bond funds and money managers are trying to wring profit from shrinking fee levels, Rosen says.

"Fees have gotten very, very low,” he says.

Annual fees and expenses for U.S. bond funds fell 14.4 percent to 83 basis points, or 83 cents per $100 invested, in 2006 from 2001, according to the Washington-based trade group Investment Company Institute. The decline, which the group traces partly to increased competition, is more dramatic since 1980, when bond funds charged $2.05 per $100…

Why do Pimco and the others bother with funds management?

"It’s like the joke about the Jewish deli,” Rosen deadpans. “The food’s no good, but the portions are huge. You have to ask them why they want it. I don’t think they’re making a lot of money on it.’

Munich-based insurer Allianz SE, which bought 70 percent of Pimco in 2000 for $3.3 billion, won’t say how much money Pimco is making; it doesn’t break out results for the unit or its 37 funds.

Rosen doesn’t think they’re making a lot of money? Some simple math: if Pimco is making 83 basis points on $747 billion in assets, that works out at well over $6 billion in fees per year. Say Pimco has annual payroll expenses of $1 billion (it only had 824 employees as of last year) – that still leaves $5 billion to cover everything else. My feeling is that Allianz is extremely happy with its acquisition.

As for the allegations of Pimco being a bully, I heard many such allegations myself when I was covering the emerging-market bond market. There are advantages and disadvantages to being big: the disadvantages are that it’s very hard to be nimble or to get in or out of your positions, while the advantages are that you can often get what you want if you throw your weight around a little. It’s natural that Pimco would want to take advantage of its enormous size; the only question is whether it crossed any legal lines when it tried to do so.