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Pimco could withstand extra $300-350 bln outflows over two years: Morningstar

An undated handout photo of Pimco's headquarters in Newport Beach, California. REUTERS/Pimco/Handout

By Jennifer Ablan

NEW YORK (Reuters) - Pacific Investment Management Co can withstand additional outflows of about $300 billion to $350 billion over the next two years before its portfolio management operation is impaired, according to research firm Morningstar Inc on Tuesday.

Pimco is struggling to stem redemptions after the unexpected departure of co-founder Bill Gross on Sept. 26, an event that has triggered another round of speculation in the bond market over leadership stability and a possible separation from its parent Allianz SE.

Morningstar based its outflow estimate on the assumption that redemptions are orderly, Allianz continues its support and Pimco has strong firm-wide fund performance, Sumit Desai, an analyst at Chicago-based Morningstar, said in a webinar Tuesday to discuss the firm.

Last week, Pimco reported outflows of $48.3 billion across its open-ended funds in October, adding to $25.5 billion of withdrawals in the previous month, Morningstar said.

In the event investors gradually withdrew $350 billion from Pimco over two years, it would represent around 19 percent of total assets, based on data showing the Newport Beach, California asset manager held $1.87 trillion in funds as of Sept. 30.

A majority of Pimco's firm-wide outflows in October stemmed from investors pulling money from its flagship Pimco Total Return Fund, which was managed by Gross. Doug Hodge, chief executive officer of Pimco, said at a conference on Monday that outflows have tapered somewhat since a huge spike on the day of Gross' exit.

Morningstar said the "wild cards" for Pimco include bond market volatility and a rebalancing out of fixed income.

Ryan Mendy, chief operating officer of The Edge Consulting Group, a research firm that focuses solely on spinoffs and special situations, said the outflows and organizational changes are weighing on Pimco's brand.

"We still maintain a view that Pimco should be spunoff into a separate entity," Mendy said. "Without a Bill or Mohamed (El-Erian) at the helm, Pimco is deprived of both brand and human face. A colossal vertical mountain for a PR damaged company to climb. Pimco's board needs to demonstrate that they can protect both investors and their money by taking action."

He said a spinoff "would lead to a distinct, focused entity creating more value for the investors and shareholders. In addition, Allianz management would be able to directly focus on other asset management and insurance operations business, thereby mitigating the investor concerns on the Pimco's performance and redemption issues."

Pimco declined to comment on Morningstar's and The Edge's reports.

(Reporting By Jennifer Ablan; Editing by Andrew Hay, Bernard Orr)