How Bill Gross and Pimco got too big for each other
The instant reaction to the sudden departure of Pimco’s bond king, Bill Gross, for Janus Capital is that the move is a disaster for Pimco and a windfall for Janus.
Certainly that’s how the stock market read the unexpected announcement. The price of Janus Capital stock soared Friday to $15.89 on the news, a gain of 43%. Allianz SE, the Munich, Germany, financial services firm that acquired Pimco in 2000 and trades on the Frankfurt exchange, lost more than 6%. That’s a loss in market value of more than $5.1 billion for Allianz, and a gain for Janus of nearly $900 million.
Yet traders may be overestimating the effect of Gross’ move on both companies. At Pimco, the peculiarities of the 70-year-old Gross’ personal management style were beginning to overshadow his storied success as an investment manager. This was exposed by his widely remarked squabbling with Mohamed El-Erian, the economist who served as co-chief executive and co-chief investment officer with Gross and was once regarded as the latter’s heir-presumptive. El-Erian left Pimco earlier this year.
In the wake of El-Erian’s departure, stories leaked out about Gross’ imperious behavior--traders were forbidden to speak to him or even make eye contact on the trading floor, the Wall Street Journal reported. He brooked no discussion or debate about his trading strategies and became hostile to rising talents on the floor.
After El-Erian’s departure, a new management team was installed at Pimco, including a new CEO, Douglas Hodge. If there were any doubts that relations between Hodge and Gross were strained, they were laid to rest by the brusqueness of the firm’s announcement of Gross’ departure: “Over the course of this year,” it reads, “it became increasingly clear that the firm’s leadership and Bill have fundamental differences about how to take PIMCO forward.”
In Europe, sentiment is building that Allianz should spin off Pimco, which is a poor fit with its core insurance businesses. That might have contributed to the parent company’s disaffection with Gross, who collects a reported $200 million in annual compensation.
It doesn’t help that Gross’ flagship, the Pimco Total Return Fund, has experienced a huge outflow of invested assets over the last two years. At the peak in March 2013, the fund comprised $289.8 billion; as of this week, according to Morningstar, that’s down to $221.6 billion, a drop of more than $68 billion.
Gross’ glittering reputation as a bond trader and a builder of a great investment business is well deserved. He co-founded Pimco as Pacific Investment Management Co. in 1971, and from its Newport Beach headquarters presided over spectacular growth; as of last June, the firm had nearly $2 trillion under management, including funds managed for Allianz affiliates.
Some of that growth, especially Gross’ success at the Total Return fund, is an artifact of good timing. Since its launch in May 1987, the yield on the 10-year U.S. Treasury bond has fallen from 8.61% to 2.52% and bond prices have risen commensurately. Still, Gross has significantly outperformed the fund’s benchmark, the Barclays US Aggregate bond index. (See accompanying charts.) Gross’ investment results so far this year have been disappointing, however. So clients may wait to see if his successors can do better.
The stock market’s assumption is that Gross’ departure will trigger a further torrent of redemptions from the Total Return fund. But it’s much too early to gauge the likelihood of investor flight, or its possible dimensions if it does happen.
To begin with, big pension funds can’t move very fast--investment decisions are made by committees, which are supposed to painstakingly weigh the pros and cons on where to place their money. Inertia is a big factor, and many of Pimco’s most important clients will probably wait to ponder the record and qualifications of the team chosen Friday to replace Gross.
Pimco ushered in the post-Gross era by naming one of his deputies, Daniel Ivascyn, to succeed him as the firm’s chief investment officer. Management of the Total Return fund is being turned over to a three-person team of Mark Kiesel, already the firm’s chief investment officer for global credit; Scott Mather, its head of global portfolio management and an Allianz veteran; and Mihir Worah, chief investment officer for return and asset allocation and a theoretical physicist with an advanced degree from the University of Chicago
The change in managers at the Total Return fund will do little to resolve what may be its biggest problem--its size. At $221.6 billion, the fund is still a behemoth, and it can be hard to get behemoths to respond even to direct commands. Percentage-point changes in investment allocations in this fund amount to billions of dollars. As Alan Livsey of the Financial Times observed, “It’s a miracle, and a testament to (Gross’) skill as a manager, that Total Return did as well as it did for so long.”
That won’t be an issue, at least at first, at Gross’ new perch. (Janus will open an office for him in Newport Beach.) Janus says Gross will be taking over its Global Unconstrained Bond Fund, which has less than $13 million in assets--making it six-thousandths of a percent the size of the fund he’s leaving. If Gross feels he needs to prove himself as a nimble trader with a fund small enough to jump to his every command, he picked the right one.
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