Big bond player trumpets growth

One way to invest in a booming industry is to put money into a firm that manages mutual funds.

In today's bull market, mutual-fund companies have grown like gangbusters as Americans strive to share in the gains. Assets under management of the United States mutual-fund industry soared from $810 billion in 1988 to $5.77 trillion now.

Something similar has happened to PIMCO Advisors Holdings LP, a Newport Beach, Calif., money-managing firm. It was managing $101 billion in assets in 1994. Now it is looking after $248 billion. (See chart below.)

The publicly traded mutual-fund company with the biggest inflow of money in 1998, PIMCO is well known for its management of bonds and other fixed-income assets. Its key bond fund, PIMCO Total Return, gets a five-star rating from Morningstar, a Chicago firm that reviews mutual funds.

PIMCO chairman William Cvengros has ambitions to keep his firm's assets growing close to the 20 percent annual pace of recent years. Such growth means more revenues from fees, and potentially more profits. In five years, he predicts, PIMCO will be managing $500 billion in assets.

To Mr. Cvengros, an investment in PIMCO is a "defensive value play." That's because shares in the company are paying a high yield - 7.7 percent last week. Further, investors have the possibility of capital gains should the stock rise along with the firm's growth. And the downside risk is relatively small, he adds.

"We are not just driven by the frothy market," says Cvengros. PIMCO is a "master limited partnership," one of about 30 such vehicles that are publicly traded on US stock exchanges. Buyers of PIMCO stock actually get a "unit," that is, a limited partnership in the company.

PIMCO's unusual legal status was grandfathered under a tax-reform act passed by Congress in 1997. This law requires that PIMCO pay a 3.5 percent federal tax on gross revenues. This amounts to about 12 percent of operating cash flow. That percentage is far less than the 35 to 40 percent of earnings a regular corporation pays to Uncle Sam. The bulk of PIMCO's earnings thus flow through to unit holders.

PIMCO offers investors another advantage: It passes on tax breaks from the purchases of other companies to unit holders. So the yield on units, after taxes, can run 5 to 6 percent, notes Cvengros.

But PIMCO's growth has not been reflected lately in its share price. A unit cost about $22 in July 1996, $35 in January 1998, and last week, after a sharp rise, about $30. One reason may be difficulties with the acquisition in 1997 of part of Oppenheimer, a New York money manager.

In its April 28 announcement of first-quarter earnings, PIMCO reported a one-time charge of 17 cents per unit. That left 21 cents per unit in profit. The charge reflected the consolidation of Oppenheimer's three offices into a midtown facility, the write-off of some equipment, plus severance costs for George Long, Oppenheimer's chief executive.

"It wasn't working," Cvengros said in an interview in Boston.

Oppenheimer has had a "value" approach to investing the money under its management. It looked for bargains in stocks. But this approach resulted in a weak performance in recent years, as it has for many other value investors.

"We have to get that performance tightened," says Cvengros. April's surge in the price of "value" stocks should help.

In the first quarter, the Oppenheimer wing of PIMCO lost $3 billion in assets, as investors fled value investing. But PIMCO's bond wing enjoyed an inflow of $7.5 billion, making for a net $4.4 billion inflow for the partnership.

PIMCO is the third-largest publicly traded investment management firm after Alliance Capital Management LP in New York and AMVESCAP, a London operation, with a big American subsidiary in Houston. But it is dwarfed by industry giants such as Fidelity in Boston and Vanguard in Valley Forge, Pa. Their shares are not traded.

With the acquisition of Oppenheimer and the addition of new funds, PIMCO now offers 51 mutual funds. Shares of these funds are generally sold through brokers or financial planners. They have a maximum front-end load, or sales fee, of 3 to 4 percent of the amount invested.

Some 38 percent of PIMCO's assets are in mutual-fund shares, variable annuities, and other equity products. The rest is invested in fixed-income assets, such as bonds, with a large chunk held by institutions, such as pension funds..

Cvengros argues that because two-thirds of PIMCO's assets are fixed-income, should the stock market tank, the partnership would hold up better than some other mutual-fund groups that are invested primarily in stocks.