Several prominent investment firms have grown by acquiring boutique investment shops. Management then must decide whether to combine the investment firms, or let them operate independently.
Allianz Global Investors, the asset-management arm of German insurance giant Allianz SE, mostly has been a hands-off acquisitor. Since 1999, it has acquired NFJ Investment Group, Oppenheimer Capital (not to be confused with Oppenheimer Funds, a former sister company), RCM, and Nicholas-Applegate, all of which subadvise its mutual funds. (It also owns bond-giant PIMCO, though that firm operates more independently than other Allianz subadvisers.) Allianz handles most of the distribution, marketing, and compliance for its fund line-up but distances itself from the day-to-day investment process. Yet Allianz has demonstrated that during tough times, it doesn't sit on the sidelines.
Model Citizens
The success of Allianz ultimately rests on the strength of its subadvisers, so it's important for each to foster a culture that makes key investment personnel want to stick around. Some have done better in this respect than others. One of the most consistent has been value shop NFJ, which Chris Najork, Ben Fischer, and John Johnson founded in 1989. NFJ is a tightly knit firm where managers and analysts work closely together, using the same dividend-focused strategy across its fund line-up. Although Fischer is the only co-founder still involved in day-to-day fund management, he has a stable team behind him. Paul Magnuson and Jeffrey Partenheimer have been with the firm since the 1990s, and NFJ has gradually hired new managers and analysts as assets have grown. All of NFJ's funds are team-managed and use the same approach, so succession should be relatively smooth when Fischer eventually retires. What's more, NFJ has made an effort to retain top investment talent. After it lost a manager to a rival firm in 2006, it implemented a deferred compensation and equity ownership plan to help with retention.
NFJ's strong management team is a plus, but the continuity of its investment philosophy is just as important. NFJ has stayed true to its dividend-focused strategy, even when it has been temporarily out of favour, as seen in 2009. The strategy has been effective over the long run, with many of NFJ's funds, including Analyst Pick Allianz NFJ Small Cap Value, producing strong long-term records. Because NFJ's funds have performed well and the firm has been stable, Allianz has remained hands-off.
The same can be said for Cadence Capital Management, the only subadviser that Allianz does not own. (Cadence employees own a majority stake, and a private-equity firm owns the rest.) The firm's independence has a few implications. For one, its employee-ownership structure gives investment personnel reason to stick around. Portfolio managers Michael Skillman and Bill Bannick have been at Cadence since the early 1990s, and Bob Fitzpatrick has been with the firm for a decade. The team also has some long-tenured analysts. Cadence's independence also means that Allianz has less control over its fund lineup and probably wouldn't push for sweeping changes to the funds or portfolio management. Fortunately, Cadence has been steady since its 1988 founding, using a single growth-at-a-reasonable-price strategy for all four mutual funds. The funds endured a rough patch during the recent credit crisis because Cadence's quantitative model had trouble navigating the frothy markets, but long-term performance has remained strong.
Problem Child
While Allianz lets its subadvisers have a fair amount of freedom in day-to-day fund management, it will intervene when there are persistent performance problems. Allianz has weeded out some of its weaker funds in recent years through fund mergers, liquidations, or subadviser changes. The most notable example involves Oppenheimer Capital, a firm that relies heavily on analyst-driven research to construct bold portfolios. While that strategy has worked relatively well on the growth side, Oppenheimer Capital's value-oriented funds have struggled; a few also have undergone manager changes. In 2008, Allianz decided to remove all six nongrowth funds from Oppenheimer Capital's retail line-up. Poor performance was a driver, but it seems that Allianz also was unwilling to tolerate the volatile nature of aggressive funds like Allianz OCC Value and Allianz OCC Renaissance, which were subsequently handed over to the NFJ team. Four other funds were liquidated, leaving Oppenheimer Capital with just three growth-oriented mutual funds (other equity and fixed-income strategies remain part of its institutional business).
Manager turnover also has been a recent theme at Oppenheimer Capital. Martin Mickus, co-manager and former analyst for Allianz OCC Target and Allianz OCC Growth, left the firm in 2009 after a decade, as did comanager Robert Urquhart. A team of fixed-income managers on the institutional side also recently jumped ship for a rival. On the plus side, longtime CIO and manager Jeff Parker is still around, and health-care analyst Bill Sandow was promoted to co-manager on both funds. The firm also hired two more experienced equity analysts to round out the growth team. The moves aren't necessarily disastrous for shareholders, but they are worth monitoring.
Good Launch, Bad Launch
Allianz's willingness to address underperforming funds benefits shareholders in the long run, but the firm's record is mixed when it comes to fund launches. For the most part, Allianz has behaved responsibly. Recent fund launches have included Allianz NFJ Global Dividend Value, Allianz RCM Disciplined Equity, and a target-date series, all of which are reasonable long-term options for shareholders. However, other new funds are less rational and seem to jump on the latest investment trends, including Allianz RCM Global Water, Allianz RCM Global EcoTrends, and Allianz NACM Global Equity 130/30. All of the funds in this latter group launched in 2007 or after, and most come with staggeringly high expense ratios. Morningstar's research suggests these funds have two strikes against them: Investors have a difficult time earning strong long-term returns from niche funds, and offerings with high expense ratios tend to underperform over the long term.
Mixed Signals
Allianz has done a better job looking out for shareholders' interests in other respects. It has closed small-cap funds before burgeoning assets have made them unwieldy. It also merged away or liquidated a few narrowly defined funds that didn't fit neatly into investors' portfolios, including Allianz RCM Financial Services and Allianz RCM Biotechnology. Furthermore, Allianz has made an effort to be more transparent with shareholders, recently announcing it would disclose a fund's portfolio holdings on its website five days after the end of the month instead of 30. Still, the firm could further improve its communications to fundholders by offering more detailed manager commentaries about fund strategy and performance. Doing so could help set expectations for investors and make them more likely to stick with a fund when it encounters a rough patch.
Overall, Allianz is a mixed bag. It has been a reasonable parent, giving its subadvisers a fair amount of autonomy and stepping in when necessary. However, some of Allianz's affiliates have not demonstrated best practices when it comes to manager turnover, easy-to-own investment strategies, and reasonable fees. All things considered, Allianz's corporate culture is average.
