Upheaval at Pimco: 5 Things You Need To Know

bill grossThe big bombshell dropped last Friday morning.

Bill Gross, the legendary “Bond King,” was abruptly quitting Pimco, the firm he founded and built into one of the largest asset managers in the world.

Not only that, but he was switching allegiance to Janus Capital Group, the much smaller Denver-based asset manager with a tiny bond division, only a fractional size of what Gross managed at Pimco.

Despite his legendary investment status, Gross’ personality quirks and overbearing management style had reportedly alienated the rising new generation of star managers at Pimco, causing them to issue an “either he goes or we go” ultimatum to Pimco’s corporate owners at Allianz.

Friday morning, we found out who won that battle. Gross left 24 hours before he was reportedly going to be fired. As the rumors swirl, here’s what you need to know about the latest bond smack down.

1).  Is this a good thing or a bad thing for Pimco?

Pimco owes a lot to Bill Gross, but we think his departure is a good thing for Pimco, as it clears the way for new talent and to a viable succession plan for the post-Gross era.

Gross’ departure will let Pimco close the door on the very public – and petty – personality conflicts that undermined its investment processes and will allow the firm to go back to the business of managing money.

“Given all his issues over last year or so, (Gross’) departure from PIMCO was not totally unexpected,” said Lou Harvey, president of ratings-provider Dalbar Inc., in an interview. “Something had to give, since there’d been so much tension in the recent past.”

Those tensions resulted in the sudden and poorly-explained departure of Mohamed A. El-Erian, Gross’ heir apparent, earlier this year, sending Pimco’s carefully-laid succession plans down the proverbial drain.

2).  How will Pimco cope without Gross?

The firm will be a different place, but Pimco has a very deep and experienced investment management team. Pimco points out that Gross managed less than 25% of total Pimco assets, and new Chief Investment Officer Dan Ivascyn and colleagues have stellar records of their own, outperforming 98% of peers over the last 3 years.

Despite its excellent long-term record, Gross’ Total Return flagship fund (the world’s largest bond fund) had suffered from a few stumbles – and asset outflows – as of late. It will undoubtedly lose assets as a result of Gross’ departure, but a reduced size may improve focus and performance.

3). Does this mean we should abandon Pimco?

We certainly want to monitor developments at Pimco, especially at Total Return fund, but Pimco is still home to some of the best and brightest bond managers.

For example, Dan Ivascyn, now elevated to Chief Investment Officer, has been at PIMCO since 1998 and was named Morningstar’s fixed-income manager of the year for the U.S. last year, a huge accomplishment.  Portfolio managers Scott Mather, Mark Kiesel and Mihir Worah will take over management of the $222 billion Pimco Total Return fund. All are already well know to the investment advisor community.

4). Should investors follow Gross to Janus?

Janus is a well-respected company and, as with Pimco, we have used their funds and investment strategies for many years.

(Of course, one of the prime advantages of being an independent investment advisor is that our firm is free to pick the best investment solutions for you from a wide selection of companies. We are beholden to no one and can select investments impartially and objectively.)

Bill Gross has an amazing record as a bond manager, and moving to a smaller fund will give him the nimbleness and flexibility he lacked at Pimco.

However, let’s not forget that as of June 30, Pimco had $1.9 trillion in assets under management, while Janus had $177 billion in assets, and only $31 million in fixed income.

At Janus, Gross will take over management of the newly launched Global Unconstrained Bond Fund with only $13 million in assets at present.

So while Janus may become more of a bond contender in the future, Gross will need a much larger team to bulk up from $13 million to the billions he used to manage … and that may take time.

Looking at recent history, when star manager Jeff Gundlach left TCW for his new firm DoubleLine, he brought many former TCW team members along with him, and still faced regulatory delays before he was able to get his new funds up and running. Gross may face similar delays before he’s able to scale up his bond operations at Janus.

So, bottom line, there are many excellent bond managers out there. Let’s keep an open mind, not make rash decisions, and select the best options on a case-by-case basis.

5).  Big money, big egos. So what else is new?

Not to sound snide, but $200 million annual paychecks and world adulation can make you lose a little bit of perspective.  It’s not unusual for the corporate masters like Allianz, owner of Pimco, and star investment managers to butt heads, or for egos to get a little out of control. (No, really.)

 We all remember when another stellar bond manager, Jeff Gundlach, blasted away from TCW to found DoubleLine. True to script, acrimonious press statements, accusations, lawsuits, and counter suits followed. We’ve been here before. Soon the theatrics will settle down and star managers will go back to doing what they do best … managing money.


About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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