EVEN though the writing had been on the wall for months, the departure of Bill Gross from Pacific Investment Management Co (PIMCO) on September 26th still came as a shock. Mr Gross, often dubbed the “Bond King”, had founded the firm back in 1971, and had built it into a giant, with $2 trillion of assets under management. In 2000 Allianz, a German insurer, had bought the firm, but Mr Gross stayed on as its chief investment officer, with continued success. His flagship “Total Return” fund did consistently better than its rivals, thanks to clever mathematical modelling and uncanny economic foresight, even as it grew to become the world’s biggest mutual fund. Over the past 15 years, it has earned a return of 164%, far above the industry’s average of 116%.
Mr Gross is leaving PIMCO for Janus, a much smaller firm; its market capitalisation was around $2 billion when the news broke, on a par with estimates of Mr Gross’s personal fortune. He released a statement saying he was switching jobs to get away from the distractions of running a giant firm and to focus instead on investing his clients’ money. However, news reports suggested that PIMCO’s board had been planning to dismiss him in the next few days anyway, and that he had jumped to avoid being pushed. Douglas Hodge, the company’s chief executive, only a few months ago praised Mr Gross for generating “more value for more investors than anyone in the history of our industry”. He now says that there is sense of relief at the firm following Mr Gross’s departure, according to the Wall Street Journal.
There appear to be three main reasons behind Mr Gross’s abrupt exit. The immediate cause was his abrasive management style. He had long planned to hand the reins to Mohamed El-Erian, a globetrotting economist who had worked for the IMF, managed Harvard’s endowment and chaired Barack Obama’s Global Development Council. But in January Mr El-Erian, who served as PIMCO’s co-chief investment officer, abruptly resigned. Although the firm’s leadership repeatedly encouraged Mr Gross to promote a more collegial atmosphere, he alienated many senior executives, in one instance by criticising some by name in a large group e-mail. After that, many of them allegedly threatened to resign if he remained in charge.
Moreover, Mr Gross’s public behaviour has grown increasingly peculiar of late. He has always been quirky—his public investment commentaries usually include long digressions on topics such as his late cat, and he once led an impromptu conga line on the PIMCO trading floor. He gave a speech at an investment conference earlier this year that struck many as unbecoming of a man to whom savers had entrusted nearly half a trillion dollars. He delivered it in sunglasses, compared himself with Justin Bieber, a 20-year-old pop star known for behaving badly, and told journalists to repeat that he was “the kindest, bravest, warmest, most wonderful human being you’ve met in your life.”
Such mis-steps might have been forgiven had Mr Gross’s charmed streak as an investor continued. But over the past three years, several misjudgements have caused his funds to lag. In 2011 he warned that American government bonds would fall in value after the Federal Reserve ended a round of quantitative easing, and sharply reduced the Total Return fund’s holdings of Treasuries. When his prophesied interest-rate spike failed to materialise, the fund finished in the bottom 15% of its peer group. It rebounded the next year, but slumped again in 2013 with a 2% loss, and trails its benchmark again this year. As a result, performance-chasing investors have run for the exit: Total Return’s funds under management have shrunk from a high of $293 billion in 2013 to just $222 billion this month. A further cloud fell over Mr Gross when the Securities and Exchange Commission, a regulator, recently announced it was investigating potential mispricing in the exchange-traded version of the Total Return fund.
However, Janus’s shares soared 43% on news of Mr Gross’s move, suggesting that many investors still have faith in him. Janus’s smaller size will allow him to trade less liquid bonds, providing him with new areas in which to work magic. Meanwhile, Allianz’s share price slid by 6%. PIMCO’s leading closed-end funds fell 6% as well—though some of those sales may have been motivated by fears that Mr Gross, who personally owns about 2% of their shares, might unload them.
As for PIMCO, the risks implicit in its strategy of promoting superstar managers have now been laid bare: changes of the guard at other giant fund-managers such as Vanguard, Fidelity or American Funds rarely make headlines. By tying its identity so closely to Mr Gross and Mr El-Erian, PIMCO may now lose a hefty chunk of its assets, even though their replacements are themselves high-performing by industry standards. At a time when ever more investors are shunning active management altogether in favour of cheaper index funds, the end of Mr Gross’s reign at PIMCO may also mark the end of the era of the superstar fund-manager that he personified.
links;http://www.economist.com/news/business-and-finance/21620809
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