What Gross’s exit means for Pimco

The king of bonds, Bill Gross, didn’t settle for an amicable retirement. What does his departure mean for Pimco, for Janus – and for himself?
What Gross’s exit means for Pimco

The bond king has abdicated his throne. On Friday, Bill Gross announced his departure from Pimco, the firm he co-founded in 1971. Pimco’s senior executives were reportedly getting ready to oust him as chief investment officer. Gross not only jumped before he could be pushed, he stuck a knife in their ribs.

Bill Gross is 70 years old. Perhaps the Pimco brass thought he’d go quietly into the night. But Gross has tweeted his readiness to work for “another 40 years”. So he is moving a few dunes down from Pimco’s Newport Beach headquarters to run a total-return global bond strategy for Janus Capital.

The fact that Gross’s tweets are followed by so many people is an indicator of what Pimco is losing. He and his former co-CIO, Mohamed El-Erian, are the investment equivalent of pop stars. It wasn’t just Gross’s track record that drew in vast flows from retail investors. He was one of Wall Street’s most accomplished impresarios. Not since equities manager Peter Lynch rode the 1980s good-time wave at the helm of Fidelity’s Magellan Fund has a mainstream investor caught the public imagination as Gross has.

Lynch notched annualised returns of 29% over his 13-year tenure, and grew the fund’s assets from $18 million to $20 billion. After he stepped down, the fund remained a powerful brand, with AUM ultimately exceeding $50 billion, but it never again consistently outperformed the S&P500. It did badly in the 2008 panic and reopened that year to new investors.

This should give Pimco hope that its brand name can outlive the charismatic individual. But the context is different. Lynch retired just as the end of the Cold War and the beginnings of the tech bubble were about to drive US equities to new heights.

Bonds today are unlikely to see a huge new bull market. On the contrary, while plenty of factors may prolong this cycle of suppressed yields, bonds are vulnerable to inevitable interest-rate hikes. Moreover, Pimco remains a giant in fixed income, despite recent redemptions: the $222 billion Total Return Fund is the largest single mutual fund in the world. That means that when things do get ugly in bondland, Pimco has plenty to lose. The lack of secondary market liquidity in fixed income could put some of its positions at great risk. (See the cover story of AsianInvestor's forthcoming October magazine edition for our take on liquidity risk.)

If Pimco is to retain its position at the heights of global asset management, it will need to define itself. What, with the charismatic founder gone (and still proclaiming from a rival’s firm), does Pimco stand for? This may mean repositioning itself as a more all-round investor (the firm does have good performance in some of its equity strategies, for example). It also needs to decide what kind of personality its brand will have. The new CIO is reportedly deputy CIO Daniel Ivascyn – not exactly a household name. Pimco could opt to prepare for life as a bond specialist, still respected, but smaller and more private. Yet it can’t simply abandon the impressive social media presence it has built on the back of Gross’s extroverted character.

Perhaps Franklin Templeton is a good model of what Pimco could become, with a good balance of strategies and a handful of media-friendly stars (Mark Mobius, Michael Hasenstab) who don’t overshadow the business or overly influence the investment process.

Meanwhile, for Janus Capital, Gross represents a chance to regain business momentum. The Denver-based firm manages assets of $178 billion. It was a huge winner in the 1990s from the tech boom, but never really recovered from the bust in terms of size or prestige. (A cautionary tale for bond-focused firms today.) For five years, 20 straight quarters, it has suffered outflows. It is one of those traditional asset managers dying a slow death as investors shift to low-cost index funds and ETFs. Janus’s AUM is too big to be nimble, but way too small to make an impact against the likes of a $4.5 trillion BlackRock.

Bill Gross managed a single fund bigger than all of Janus (whose group includes units Intech Investment Management, a mathematics-based fund house, and an 80% stake in Perkins Investment Management). He has a big following among both retail and institutional clients, and some will follow him to Janus. But whether any of his star dust rubs off on the corporate brand in Denver remains to be seen – and if Gross’s new incarnation fails to generate the kind of performance he once bestowed upon Pimco, which is likely given market conditions, it may not matter.

For Gross himself, the move is probably a good one. He gets to poke the Pimco and parent Allianz executives in the eye and he’ll probably be given plenty of freedom at his new home. He likely wants to be left to his own devices, free of the constraints that running a giant firm entailed. At a physically fit 70, he can easily work for another decade. And he still gets to be Bill Gross – a man, after all, who called the 1980s bond bull market, and who also avoided reaching for yield in 2006-07, decisions that went against the grain and made Pimco great.

But somewhere in the back of his mind, surely he must be wondering how things could have turned so wrong, and how he lost the trust of all of the people around him? Or maybe not: he seems oblivious to the dents his reputation have suffered over the past year, ever since he ousted El-Erian and then wouldn’t shut up about it. The king of bonds, once revered for his acumen and his California Zen-like cool, isn’t taking the throne with him.

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