The Aleph Blog » Blog Archive » PIMCO in Theory and Practice, Part II

PIMCO in Theory and Practice, Part II

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.  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 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.






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2 Responses to PIMCO in Theory and Practice, Part II

  1. [...] David Merkel adds some very useful facts to the debate. « Previous Post Next Post » [...]

  2. [...] Merkel turned me onto this piece (gated) by Bill Gross wherein he describes the PIMCO strategy in a fairly readable way. [...]

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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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