* Pimco performance, governance issues worry Allianz owners
* Criticism from big shareholders at AGM would be unusual
* Allianz SE shares have underperformed insurance index
* Latest data show Pimco outflows continuing in March
By Kathrin Jones and Jonathan Gould
FRANKFURT, April 4 (Reuters) - Several of the biggest investors in Allianz are pressing the German insurer to step up oversight of its California asset management unit Pimco and one is considering the unusual step of going public with its concerns at a shareholder meeting in May.
Reuters contacted the 10 top investors in Allianz as well as smaller shareholders to gauge their views on Pimco, the bond powerhouse whose reputation has been tarnished by a run of poor returns and the departure of CEO Mohamed El-Erian amid a row with co-founder Bill Gross.
Six of the biggest shareholders declined to comment ahead of the Allianz annual general meeting (AGM), scheduled to take place on May 7. One expressed confidence that the German firm was addressing the management and performance issues at Pimco.
However three other top shareholders, speaking to Reuters on condition that they were not identified, were more critical, saying Allianz still needed to persuade them that the problems at Newport Beach-based Pimco were under control.
Specifically, they said they wanted the Munich-based firm to rethink the management structure that was put in place at Pimco after El-Erian's departure. The new configuration has six deputy chief investment officers (CIOs) under Gross. They also want assurances on Gross's pay and a detailed long-term plan on how Pimco plans to broaden its focus beyond fixed income.
Allianz, which has said little publicly about Pimco's performance or the internal disagreements at the fund manager, declined to comment.
Douglas Hodge, who replaced El-Erian as chief executive of Pimco, told Reuters on Thursday that the California group has spoken to "literally thousands" of its clients and that the vast majority are comfortable with the new structure.
Over the last five years, Pimco points out, it has launched over 150 new investment funds across multiple platforms including private equity, hedge funds and active equities asset classes.
The critics say the developments of the past months suggest Gross has been given too much freedom. Investors pulled $3.1 billion from Pimco's flagship Total Return fund in March, the 11th straight month of outflows from the world's largest bond fund, and its performance on the month lagged 95 percent of its peers, fund data firm Morningstar said this week.
"The leash is obviously too long because there is a performance issue now," said one top-10 investor. "A fully owned subsidiary should not be run like this."
A second top-10 investor said it was considering attending the Allianz AGM for the first time in years in order to raise questions about governance at Pimco that it feels need to be addressed in public.
If the shareholder does take this step, it would be an unusual move in Germany, where big institutional holders usually voice their concerns in private.
The three critics, which together hold less than 10 percent of Allianz shares, said they were still assessing whether private meetings with Allianz would be sufficient to alleviate their concerns.
"For us performance is the issue, not the battle between Gross and El-Erian," the third top-10 critic said.
According to Reuters data, the top 10 investors in Allianz are: Blackrock Asset Management, Credit Suisse Asset Management, Norges Bank, Harris Associates, Northern Cross, Blackrock Institutional Trust, The Vanguard Group, Deutsche Asset and Wealth Management, Allianz Global Investors Europe and Union Investment.
Gross, who turns 70 later this month, co-founded Pacific Investment Management Co (Pimco) in 1971. Known on Wall Street as the "Bond King", his nose for the fixed income market has turned Pimco into the world's largest bond investor with $1.9 trillion of assets under management at the end of 2013.
Pimco's success has done wonders for Allianz. In the past decade alone, the contribution of the asset management business to the German group's operating profit has climbed almost four-fold to 3.2 billion euros, representing a third of total core earnings. Allianz now sells nearly two-thirds of its investment products to North American clients.
But over the past year Gross has shown signs of losing his touch. In a difficult year for bond markets, Gross's flagship Pimco Total Return Fund lost 1.9 percent in 2013, its first annual loss since 1999 and worst performance since 1994, according to Morningstar. In the first three months of this year, Pimco had $15.45 billion of outflows from U.S. open-end mutual funds.
Compounding the performance worries have been a series of media reports pointing to a rift between Gross and El-Erian and raising questions about the founder's management style. Allianz scrambled into damage-control mode following El-Erian's departure, with board members trying to reassure the group's top institutional owners, several shareholders said.
Pimco has played down the rift and Hodge says the firm had been discussing giving bigger roles to senior portfolio managers long before El-Erian left.
The new structure was unveiled to counter two chief concerns of investors: firstly, that Pimco had become a "one man show" with no natural successors to Gross, and secondly that it was too focused on flagging fixed income.
The moves have convinced some. Small Stockholm-based investor Labrusca Family Office saw the turmoil as a chance to buy into Allianz, whose shares are down over 7 percent since El-Erian's departure was announced on Jan. 21. The STOXX Europe 600 insurance index is down 1 percent in the same period.
Sell-side analysts are also bullish on the shares. According to a Reuters poll, 23 out of 35 analysts still rate Allianz stock a "buy" or "strong buy".
Allianz, which bought Pimco for $3.3 billion in 2000, says its oversight is rigorous and appropriate. Sources close to the company say Thomas Naumann, the finance chief of its asset management arm, travels to Newport Beach twice a month. The sources describe governance and talent development at Pimco as a "core activity" for Allianz.
But some investors are still not satisfied.
The first top-10 investor pointed to reports that Gross has been taking home as much as $200 million per year, saying shareholders were "not willing to accept this any more".
A longtime trustee for Pimco funds mentioned the $200 million figure in an interview last month. Allianz does not make Gross's compensation public and Pimco said it did not want to comment on the matter.
Another concern, expressed by several shareholders, was that Pimco has been slow to adjust its product offering in anticipation of what some believe could be a lasting bear market for bonds.
Pimco started a push into equities over four years ago and brought in Virginie Maisonneuve - now one of the six deputy CIOs - from Schroders in January to serve as global head of equities. But it has resisted big acquisitions to bolster the business, choosing to build it up organically instead.
"We are taking the right steps in our equity business," Hodge told Reuters, saying Pimco wanted to avoid compromising on quality by moving too fast.
Allianz CEO Michael Dieckmann admitted in February that Pimco's equities build-up had been slow, but made clear this was not a criticism. "Pimco doesn't need to make acquisitions," he said. (Additional reporting by Tom Atkins in Frankfurt and Jennifer Ablan in New York; Writing by Noah Barkin; Editing by Janet McBride)
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